Edited version of private advice

Authorisation Number: 1051574799355

Date of advice: 8 October 2019

Ruling

Subject: Business losses

Question

Does ABC Pty Ltd satisfy the conditions of the similar business test, in order to utilise available losses, in the period ended 30 June 20XX?

Answer

Yes.

This ruling applies for the following period:

1 January 20XX to 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

On X May 20XX (the test time), XYZ Pty Ltd was acquired by ABC Pty Ltd (ABC Pty Ltd's largest international reseller), resulting in an ownership change and name change to ABC Pty Ltd (ABC). Consequently, the continuity of ownership test is not satisfied.

Prior to the change in ownership on X May 20XX, (then) XYZ Pty Ltd provided a subscription based online access to products, using products from the X product range. The X products were supplied by XYZ Inc. and the client base was the X industry throughout all states of Australia.

The X product range provides products and services to assist clients in the X industry to improve their X behaviours and reduce risks and costs in all states of Australia.

Since the change in ownership occurred, ABC has maintained the same client base and geographical market.

All staff including the general manager, finance and technical staff that were part of XYZ Pty Ltd prior to the change in ownership are still employed in similar or expanded roles. The business has since added additional staff in all areas to supplement the expected growth.

ABC continues to utilise the same business assets which XYZ Pty Ltd maintained prior to the change in ownership.

During the transition in ownership, the head office was located in X. In January 20XX, X months after the change in ownership, the decision was made to move the head office from X to X in order to prepare for future growth opportunities. However majority of the business continues to be conducted remotely or via a sales team at client premises.

The business continues to sell and support products and services from X range, provided by the same supplier, XYZ Inc.

In addition to the original product range sold by XYZ Pty Ltd, the business is now selling and supporting the X products and services, which is an updated version of the same product. The updated X product range has allowed for business expansion in the X industry across all sates of Australia.

The business model has remained subscription based and the products continue to provide products and services to assist clients in the X industry.

ABC has a substituted account period, being from X January 20XX to X June 20XX. This is the business continuity test period.

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 165-211, and

Income Tax Assessment Act 1997 subsection 165-211(2).

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 either:

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

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

In determining whether section 165-10 of the ITAA 1997 prevents a company from deducting a tax loss, the ownership test period is the period from the start of the loss year to the end of the income year.

Section 165-12 of the ITAA 1997 addresses the requirements for a company to maintain the same owners. These are:

·        There must be persons who had more than 50% of the voting power in the company at all times during the ownership test period (section 165-12(2) of the ITAA 1997)

·        There must be persons who had rights to more than 50% of the company's dividends at all times during the ownership test period (section 165-12(3) of the ITAA 1997)

·        There must be persons who had rights to more than 50% of the company's capital distributions at all times during the ownership test period (section 165-12(4) of the ITAA 1997)

In this case, you have advised that ABC Pty Ltd does not satisfy the requirements of the conditions in section 165-12 of the ITAA 1997. Therefore, in order to access the losses, ABC Pty Ltd must satisfy the business continuity test in section 165-211 of the ITAA 1997.

Under the similar business test, companies and listed widely held trusts will be able to utilise tax losses made from carrying on a business, if it carries on a similar business in the income year when it wants to use the loss (the 'similar business test period') as it carried on immediately before the change of ownership or control that caused the company to fail the continuity of ownership test (the 'test time').

Subsection 165-211(2) of the ITAA 1997 provides that, without limiting the matters that may be taken into account in ascertaining whether the company's current business is similar to its former business, the following must be taken into account:

(a) the extent to which the assets (including goodwill) that are used in its current business to generate assessable income throughout the business continuity test period were also used in its former business to generate assessable income;

(b) the extent to which the activities and operations from which its current business generated assessable income throughout the business continuity test period were also the activities and operations from which its former business generated assessable income;

(c) the identity of its current business and the identity of its former business;

(d) the extent to which any changes to its former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business.

During the similar business test period, ABC Pty Ltd maintained and continued to use in the current business the same assets of the previous business, the same activities used to produce assessable income, the identity of the former business, and additionally the assets, products, processes, services and organisational methods of the former business continued to be used in the current business.

Therefore the Commissioner is satisfied that ABC Pty Ltd satisfies the requirements set out in section 165-211 of the ITAA 1997 in order to utilise its losses.

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