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Edited version of your written advice
Authorisation Number: 1012994775983
Date of advice: 14 April 2016
Ruling
Subject: Same business test
Question
Does the company currently satisfy the same business test under section 165-210 of the Income Tax Assessment Act 1997?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The shares in the company changed ownership in 20XX.
One of the existing directors from prior to the change of ownership has remained with the company as a director.
You advise that there has been no change in the services provided. There were no services provided previously, that are no longer available and there are no additional services now provided as a result of the change of ownership.
You advise the subsequent to the ownership change, the company's Public Liability and Professional Indemnity Insurances did not require amendment. The assessment went through areas such as fees generated, type of work, type of clients and geographic area.
Relevant legislative provisions
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
Section 165-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a company cannot deduct a tax loss unless it either meets the condition in section 165-12 (which is about the company maintaining the same owners), or it meets the conditions in section 165-13 (which is about the company carrying on the same business).
Subsections 165-210(1) and 165-210(2) include three tests, each of which must be satisfied by a company in order for the company to meet the requirements of section 165-13 and section 165-210. These requirements are referred to as the same business test. 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 (TR 1999/9) sets out the Commissioner's views on the application of the same business test in relation to the relevant provisions.
Paragraph 8 of TR 1999/9 provides that the same business test in section 165-210 is satisfied by a company where at all times during the year in which it claims a deduction for a prior year loss:
• carried on the same business (meaning the business of the company as an entirety, or its 'overall business') that is carried on immediately before the change in the beneficial ownership of shares by reason of which it ceased to satisfy the continuing ownership and control requirements described in section 165-12;
• did not carry on any business (meaning a particular undertaking or enterprise) other than a business of a kind carried on before the disqualifying change as part of the overall business;
• only derived income from transactions of a kind that it had entered into in the course of the overall business before the change of ownership; and
• the anti-avoidance provisions in subsection 165-210(3) do not apply to the company.
In considering whether the company will satisfy the same business test, the activities of the company are considered in the context of looking at the business conducted by the company at all times during the same business test period (the year in which the company is seeking to recoup the losses) and immediately before the test time (when the ownership or control test was failed).
The first test which must be satisfied is found in subsection 165-210(1) of the ITAA 1997 and comprises a positive requirement that the company carry on at all times during the period of recoupment, the same business as the business it carried on at the change-over.
Avondale Motors (Parts) Pty Ltd v. FC of T (1971) 124 CLR 97; 45 ALJR 280; 2 ATR 312; 71 ATC 4101 (Avondale Motors) is the leading authority on the application of the same business test in section 80E of the Income Tax Assessment Act 1936. In Avondale Motors, Gibbs J held that the reference to "same business" in section 80E required that the taxpayer carry on the "identical business" at all times during the period of recoupment, rather than a business of the same kind or similar kind.
It is also necessary to consider the new business and transaction tests contained in paragraphs 165-210(2)(a) and (b).
The new business test puts a limit on the type of expansion that the company may undertake if it is to retain the benefit of accumulated losses. In order for the company to benefit from accumulated losses, it must not derive assessable income from an enterprise or undertaking of a kind that it is not treated as having been engaged in before the test time
Further, subsection 165-210(3) provides the anti-avoidance test and states 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.
According to the facts in the present case, the company has not commenced any business or entered into any transactions of a kind that had not been previously carried on for the purpose of satisfying the same business test. Consequently, we accept that the company currently satisfies the same business test requirements under section 165-210 of the ITAA 1997.
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