Edited version of private advice

Authorisation Number: 1051754535671

Date of advice: 15 September 2020

Ruling

Subject: Application of the same business test

Question 1

Will tax losses incurred by the Joining Entity for the year 20YY satisfy the same business test of the modified business continuity test in section 707-125 of the Income Tax Assessment Act 1997, so that they can be transferred to Head Entity as the head company of the Head Entity income tax consolidated group?

Answer

Yes.

Question 2

If the same business test of the modified business continuity test is not satisfied under Question 1, will tax losses incurred by the Joining Entity for the year 20YY satisfy the similar business test of the modified business continuity test in section 707-125 of the Income Tax Assessment Act 1997, so that they can be transferred to Head Entity as the head company of the Head Entity income tax consolidated group?

Answer

As the same business test of the modified business continuity test is satisfied under Question 1, a ruling on the similar business test of the modified business continuity test in section 707-125 of the Income Tax Assessment Act 1997 is not required.

This ruling applies for the following period:

Income year ending 30 June 20UU

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Head Entity is an Australian resident public company that is listed on the Australian Securities Exchange and the head company of an income tax consolidated group (the Head Entity TCG).

The Head Entity acquired 100% of the share capital of the Joining Entity under a share sale agreement that settled in year 20XX and the Joining Entity joined the Head Entity TCG as a subsidiary member.

As at year 20XX, the Joining Entity had carried forward revenue losses relating to the year 20YY.

The Joining Entity

The Joining Entity is an Australian resident trading company.

The Joining Entity was owned by the former Parent Entity during the years 20ZZ to 20XX (the Historical Period). During the Historical Period, the ultimate ownership of the Joining Entity was held by a number of private equity shareholders.

The Joining Entity's business activities

The Joining Entity is a distributor of certain industry products, with its main operations in the Australian market.

The Joining Entity's business did not have external debt financing the business operations during the Historical Period.

Products:

The Joining Entity has a diverse portfolio of products, comprising ten key product lines, secured by a number of long-term exclusive supply arrangements.

The products sold by the Joining Entity business remained largely the same over the Historical Period.

Goodwill

When the former Parent Entity took control over the Joining Entity's business, the source of goodwill of the Joining Entity's business related to:

·         its manufacturing operations, and

·         its distribution channels and customers.

Whilst the goodwill related to two sources, the primary source was its distribution channels and customers for its industry products.

Intellectual property assets

There were no changes to the Joining Entity's brand name, logo, or trademark throughout the Historical Period. These assets are central to the income generating activities of the Joining Entity as a distributor.

During the years 20YY to 20XX, the Joining Entity:

·         owned four trademarks, a domain name, and was the licensee of two trademarks that were used in connection with its business, and

·         sold three trademarks as part of the sale of its Manufacturing Facility A.

Manufacturing facilities and store locations

The Joining Entity is organised across multiple branches in different locations comprising:

·         multiple distribution centres in Australia

·         a bulk import facility in Australia

·         export operations, and

·         a head office in Australia.

During the years 20YY to 20XX, the Joining Entity also had manufacturing operations in Australia (Manufacturing Facility A and Manufacturing Facility B).

At the beginning of year 20YY, the Joining Entity had approximately 201 employees, incorporating 115 employees in distribution and head office functions, and approximately 86 employees at Manufacturing Facility A.

As at the year 20XX, the business employed 117 employees in distribution and head office functions, and there were no employees or contractors in the Joining Entity's workforce involved directly in manufacturing.

There were no changes to the locations of the distribution centres or Head Office over the Historical Period.

The net working capital of the business remained relatively steady through the Historical Period, apart from some seasonality impact.

Directors and management

There were no significant changes to the Directors or Management of the Joining Entity's business during the Historical Period.

Customer base

The Joining Entity has a diverse customer base in the industry products market.

There were no significant changes in the Joining Entity's turnover of gross assets throughout the Historical Period, as it continued to sell the same products to the same customers and generated similar sales revenue.

There were no shifts in the customer base for its products from industrial users to wholesalers, or vice versa, during the Historical Period. Its customer base has largely remained stable.

Suppliers

The Joining Entity distributes a comprehensive range of products through exclusive long-term supply agreements with manufacturers.

At the beginning of the year 20YY, the product lines were categorised as follows:

·         two product lines were manufactured by the Joining Entity at Manufacturing Facility A

·         six product lines were sourced locally, and

·         two product lines were sourced internationally.

In the year 20XX, the 2 product lines that were manufactured by the Joining Entity were sourced locally.

Based on supplier spend data for the years 20YY and 20XX, the top suppliers remained largely the same.

Business operations through the Historical Period

Business operations in year 20ZZ

After the former Parent Entity took control of the Joining Entity's business in year 20ZZ, focus was put on the distribution aspect of the business, which led to the sale or closure of a number of manufacturing facilities in the year 20ZZ.

Business operations in year 20YY

At the start of the year 20YY, the Joining Entity held a number of supply contracts in respect of its product lines. The only remaining manufacturing operations of the Joining Entity were Manufacturing Facility A and Manufacturing Facility B.

Part way through year 20YY:

·         the Joining Entity closed Manufacturing Facility B.

·         the supply agreement between the Joining Entity and one of its major suppliers (Supplier C) was renewed for a ten-year term, with no material changes to the commercial terms.

·         the supply agreement between the Joining Entity and one of its suppliers (Supplier B) was terminated.

·         the Joining Entity sold Manufacturing Facility A. As part of the sale:

-        the Joining Entity entered into an exclusive ten-year supply agreement with the purchaser (Supplier A) in order to continue to source the same two product lines from the same manufacturing facility,

-        the supply agreement made the Joining Entity the exclusive customer of Manufacturing Facility A, and

-        under the supply agreement, the existing product prices were maintained for the majority of the stock keeping units, with limited changes.

During the year 20YY:

·         there were no sales of products manufactured at Manufacturing Facility B.

·         the products manufactured at Manufacturing Facility A represented approximately 26% of the total revenue.

·         the Joining Entity continued to provide the same ten product lines to the same customer base before and after the sale and closure of its manufacturing facilities.

Business operations in year 20XX

Part way through year 20XX, the Joining Entity entered into a supply agreement with a new supplier (Supplier D) to replace the supply agreement with Supplier B.

In the first half of year 20XX, the supplier spend to Supplier A was 27% of all supplier spend.

As at the joining time in year 20XX, the Joining Entity continued to provide the same ten product lines to the same customer base as it had done in year 20YY.

Other matters

The Head Entity is not able to identify the exact beneficial owners of the Joining Entity during the Historical Period.

Relevant legislative provisions

Division 165 of the Income Tax Assessment Act 1997 (ITAA 1997)

Section 165-10 of the ITAA 1997

Section 165-12 of the ITAA 1997

Section 165-13 of the ITAA 1997

Division 166 of the ITAA 1997

Subdivision 166-A of the ITAA 1997

Section 701-1 of the ITAA 1997

Subdivision 707-A of the ITAA 1997

Section 707-120 of the ITAA 1997

Section 707-125 of the ITAA 1997

Subsection 995-1(1) of the ITAA 1997

Reasons for Decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Question 1

Will tax losses incurred by the Joining Entity for the year 20YY satisfy the same business test of the modified business continuity test in section 707-125 of the Income Tax Assessment Act 1997, so that they can be transferred to Head Entity as the head company of the Head Entity income tax consolidated group?

Summary

Yes, the tax losses incurred by the Joining Entity for the year 20YY will satisfy the same business test of the modified business continuity test in section 707-125, such that they can be transferred to the Head Entity as the head company of the Head Entity income tax consolidated group.

Detailed reasoning

Section 701-1 states that if an entity is a subsidiary member of a consolidated group for any period, it is taken to be a part of the head company of the group, rather than a separate entity during that period.

Under Subdivision 707-A, a loss made by an entity before the time it becomes a member of a consolidated group is transferred to the head company of the group at that time if the entity could have utilised the loss had the entity not become a member of the group.

These rules apply to losses incurred after 30 June 1999. This Subdivision is applied to each loss that the joining entity seeks to transfer separately, and not the total amount of all the losses carried forward at the joining time.

Section 707-120 effectively provides that an unused carried forward loss of a joining entity can be transferred to the head company of the joined group to the extent that the joining entity could have utilised the loss for an income year consisting of the 'trial year' (assuming that the joining entity had sufficient income or gains for the trial year against which to apply the loss and the joining entity had not become a member of the joined group).

Transfer of loss from joining entity to head company

Section 707-120 contains the test for transfer of losses from a joining entity to the head company of a tax consolidated group.

Broadly, this means that the tax loss must satisfy the general recoupment rules before it may be transferred to the head company of the joined group at the joining time.

The trial year:

Subsection 707-120(2) sets out the meaning of the trial year. Broadly, the trial year is the period:

·         starting at the latest of these times:

-        the time 12 months before the joining time

-        the time the joining entity came into existence, or

-        the time the joining entity last ceased to be a subsidiary member of a consolidated group, if the joining entity had been a member of a consolidated group before the joining time but was not a member of a consolidated group just before the joining time, and

·         ending just after the joining time.

In the Joining Entity's circumstances, the trial year will be the period that starts 12 months before the joining time, and ending just after the joining time during the year 20XX.

General loss recoupment rules

The general loss recoupment rules that need to be considered when determining whether the joining entity could have utilised a loss (had it not become a member of a consolidated group) are set out under Division 165.

Section 165-10 provides that a company cannot deduct a tax loss unless it can satisfy:

·         the continuity of ownership test under section 165-12, or

·         alternatively, pursuant to section 165-13, the business continuity test (being either the same business test at section 165-210, or alternatively, the similar business test at section 165-211).

These tests are modified, under Subdivision 166-A, for widely held companies or eligible Division 166 companies.

Continuity of ownership test

Broadly, a company fails the continuity of ownership test (COT) if it undergoes a substantial change in its ownership or control during the period starting at the beginning of the loss year and ending at the end of the year when the company wants to use the loss.

For the purposes of the transfer test in section 707-120, as the trial year ends immediately after the joining time (paragraph 707-120(2)(b)), the COT is satisfied if the same majority ownership of the joining entity was maintained from the start of the income year in which the loss was made until just after the joining time.

In this case, the Joining Entity failed COT in 20XX when the Head Entity became the owner of 100% of the Joining Entity's issued shares.

Business continuity test

Where a loss company fails the COT in section 165-12, section 165-13 provides that the company can still recoup its tax losses if the business continuity test (BCT) in Subdivision 165-E is satisfied.

As the Joining Entity was 100% acquired by the Head Entity during the year 20XX and, as a result, it fails to meet any of the conditions in subsections 165-12(2), (3) or (4), it must satisfy the conditions in section 165-13 in order to be able to deduct the tax loss.

Business continuity test period

The business continuity test period (BCT period) is a defined term under section 995-1, which states that the BCT period has the meaning given by a number of sections.

For the purpose of general loss recoupment rules, the BCT period and test time is determined by the table provided by subsection 165-13(2).

Item 2 of the table at subsection 165-13(2) provides that if it is not practicable for the company to show that it has maintained the same owners for any period since the start of the loss year, the default test time is the start of the loss year.

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 5) 2003 provides some guidance at paragraphs 4.17 to 4.18 about what 'practicable' means for the purpose of section 165-13, stating that "...impracticability may arise where the necessary information on the beneficial ownership of shares does not exist or where the information cannot reasonably be obtained" and that while a company may be able to identify that it has not satisfied the COT between a period of time "... it may be impracticable to point to the time it actually failed the test."

In the Joining Entity's circumstance, its ultimate ownership was held by private equity shareholders during the Historical Period.

As the Joining Entity cannot show that it has maintained the same ultimate owners for any period since the start of the loss year (20YY), it is not practicable for the Joining Entity to demonstrate that there is a period for which it has maintained the same owners. The Joining Entity therefore has access to the BCT under item 2 in the table at subsection 165-13(2).

Modified business continuity test period for tax consolidated groups

Section 707-125 contains modifications to the BCT for a company with post-1999 losses that becomes a member of a tax consolidated group.

For the purposes of working out whether the loss is transferred, pursuant to subsection 707-125(2), section 165-13 is treated as requiring the joining entity to satisfy the BCT for:

·         the BCT period, consisting of:

-        the trial year, and

-        the income year that included the test time worked out for section 165-13 for the joining entity (disregarding paragraph (b) of this subsection), if that income year started before the trial year, and

·         the test time, just before the end of the income year for which the loss was made by the joining entity.

Where the loss is transferred from the joining entity to the head entity, the assumption at subsection 707-120(3) also applies. Effectively, subsection 707-120(3) means that any change in the Joining Entity's business activities at and just after the joining time during the year 20XX is not relevant for transfer testing. As a result, it is the business activities just before the joining time during the year 20XX that is relevant for transfer testing purposes.

Accordingly, for the purpose of working out whether the loss can be transferred to the Head Entity under the business continuity test, the following will apply to the Joining Entity:

Same business test

Section 165-13 has the effect that a company may still use its tax losses despite failing the COT provided it satisfies the same business test of the BCT.

The same business test is set out in section 165-210. Broadly:

·         A company satisfies the BCT if throughout the BCT period it carries on the same 'business' as it carried on immediately before the test time.

·         The company does not satisfy the BCT under section 165-210 if, at any time during the BCT period, it derives assessable income from a business of a kind that it did not carry on before the test time, or a transaction of a kind that it had not entered into in the course of its business operations before the test time.

·         The company also does not satisfy the BCT under section 165-210 if, before the test time it started to carry on a business it had not previously carried on, or 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 of, or for purposes including the purpose, of being taken to have carried on throughout the BCT period the same business as it carried on immediately before the test time.

Identifying the 'business' for the purpose of the same business test

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) explains the Commissioner's view on the application of the same business test.

Paragraph 12 of TR 1999/9 provides that "...for the purpose of the same business test, a company is treated as carrying on one overall business" and "...the reference to 'business' in the same business test is a reference to all of the activities carried on by the company at the change-over and during the period of recoupment, irrespective of whether those activities constitute or are treated by the company as constituting separate or distinct activities, enterprises, divisions or undertakings carried on by the company."

Furthermore, paragraph 37 of TR 1999/9 provides that "...activities that have been permanently discontinued before the change-over are unlikely to be relevant to the identification of the business carried on immediately before that change-over."

First test - carry on the same business

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" (paragraph 13 of the TR 1999/9).

Paragraph 13 of TR 1999/9 further provides that "...a company may expand or contract its activities without necessarily ceasing to carry on the same business. The organic growth of a business though 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 loss of activities on a considerable scale, a company may fail the test."

The leading authority on the application of the same business test is Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation [1971] HCA 17; (1971) 124 CLR 97 (Avondale Motors). In Avondale Motors, Gibbs J said (at CLR 105) "...In my opinion in the context of the section the words "same as" import identity and not merely similarity..."

In TR 1999/9, the Commissioner considers what impact the discontinuation of an ongoing business may have on the satisfaction of the same business test. Paragraphs 38 to 40 of TR 1999/9 relevantly provide that 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..." and that "...mere expansion or contraction of the taxpayer's business may not result in a change to the identity of the business carried on by the taxpayer." However, "...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."

Paragraph 43 of TR 1999/9 further provides that whether the discontinuation of an activity will produce a change of business is ultimately a question of degree.

Paragraph 61 of TR 1999/9 provides an illustration of thirteen factors that would be considered in determining whether the same business test should apply to a hypothetical manufacturer of widgets where there has been a change of ownership following a loss year:

a)    changes to the product manufactured;

b)    whether the taxpayer commences any other activities in addition to manufacturing activities of the taxpayer;

c)    changes in the manufacturing activities of the taxpayer;

d)    changes in the persons to whom the taxpayer sells the product;

e)    changes in the mix of customers of the taxpayer;

f)     changes in the turnover or gross assets of the taxpayer attributable to sale of the products directly to companies for industrial use or attributable to the sale of the products to wholesalers;

g)    changes in the method of selling the products;

h)    changes in the taxpayer's capital and working capital;

i)      changes in the goodwill of the taxpayer;

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

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

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 services performed by persons who are employed or contracted by the taxpayer;

m)   changes in the directors and/or management of the taxpayer.

In respect of the Joining Entity's circumstances:

a)    On the facts, the ten product lines offered by the Joining Entity's business have remained the same throughout the Historical Period.

At the start of the BCT period, the Joining Entity sourced its product lines through a mix of supply contracts and manufacturing:

·         Eight out of the Joining Entity's ten products lines were sourced through local and international suppliers. The Joining Entity held a number of supply agreements, including supply contracts with Supplier B and Supplier C.

·         Two of the Joining Entity's ten product lines were manufactured at Manufacturing Facility A.

During the BCT period:

·         The supply agreement between the Joining Entity and Supplier C was renewed for a ten-year term, such that the Joining Entity could continue to offer the same product lines.

·         While the agreement between Supplier B and the Joining Entity was terminated in 20YY, it was later replaced by a supply agreement with Supplier D in 20XX, such that the Joining Entity could continue to offer the same product lines.

·         Manufacturing Facility A was sold in 20YY. In its place, the Joining Entity entered into an exclusive ten-year supply agreement with the purchaser and continued to provide the same two product lines to its customers.

·         The closure of Manufacturing Facility B was completed in 20YY. However, there had been no sales of products manufactured at Manufacturing Facility B during 20YY.

b)    The Joining Entity business did not commence any additional activities or produce any other new or distinctly different products for sale to its customers. Even though the Joining Entity ceased its manufacturing operations, the Joining Entity entered into new supply agreements with the acquirers of its manufacturing operation facilities so it could continue to provide the same products. This is consistent with the Joining Entity's other eight product lines, which continued to be sourced from local and international manufacturers throughout the BCT period.

c)    After the former Parent Entity took control of the Joining Entity's business in 20ZZ, focus was put on the distribution aspect of the business. The vast majority of the changes to the Joining Entity's manufacturing operations, including closure and sale of existing manufacturing facilities, occurred during 20ZZ and outside the BCT period. By 20YY, only Manufacturing Facility A and Manufacturing Facility B remained. Of these, only products manufactured at Manufacturing Facility A were sold during 20YY, and they only represented two of the ten product lines offered by the Joining Entity. The Joining Entity sourced its other eight product lines through suppliers. Manufacturing Facility A and Manufacturing Facility B were respectively sold or closed by the end of 20YY. By the start of 20XX, the Joining Entity did not hold any manufacturing facilities and the Joining Entity business was a purely acquisition and distribution business.

d)    There were no changes to the customers that the Joining Entity sells its products to. The business has continued to sell these products to its key customers.

e)    There were no substantial changes to the mix of customers to whom the Joining Entity sells its products. The business has continued to market its products to its customer base in the same way.

f)     There were no significant changes in the turnover of gross assets of the Joining Entity as it has continued to sell the same products to the same customers and generated similar sales revenue. There has not been any shift in the customer base for its products from industrial users to wholesalers, or vice versa. Its customer base has largely remained stable.

g)    There were no changes in the method that the Joining Entity uses to sell its products. The Joining Entity business has continued to sell its product through the same distribution centres located around Australia.

h)    Over the Historical Period, the working capital of the business remained relatively steady and the business did not have external debt financing the business operations.

i)      When the former Parent Entity took control over the Joining Entity's business in year 20ZZ, the main source of goodwill of the Joining Entity's business related to its manufacturing operations, and its distribution channels and customers for its products. However, the primary source of goodwill was its distribution channels and customers for its products.

Furthermore, starting in 20ZZ, the former Parent Entity began to sell and close the Joining Entity's manufacturing operations. By the start of 20YY, only Manufacturing Facility A and Manufacturing Facility B remained, and of these only Manufacturing Facility A was still active. Both were respectively sold or closed in 20YY.

j)      The Joining Entity continued to carry on its business from the same locations throughout the Historical Period.

k)    There were no changes to any of the Joining Entity's brand name, logo, or trademark throughout the Historical Period. These assets are central to the income generating activities of the Joining Entity as a distributor.

The only change to any trademarks or intellectual property of the Joining Entity's business was the sale of the trademarks and intellectual property related to the Manufacturing Facility A in 20YY.

l)      There was little change in the number of employees or their role in the Joining Entity's business over the Historical Period, apart from those employees impacted by the sale and closure of Manufacturing Facility A which caused a reduction in the total number of persons employed.

m)   There were no significant changes to the Directors or Management of the business of the Joining Entity.

First test - conclusion

Considering and weighing all the factors, and having regard to all the circumstances, on balance in respect of the 20YY tax losses, the same business test at subsection 165-210(1) is satisfied.

Second test - new business test

Paragraph 165-210(2)(a) provides that a company does not satisfy the same business test if, at any time during the same business test period, it derives assessable income from a business of a kind that it did not carry on before the test time. This is referred to as the 'new business test.'

As provided in paragraph 66 of TR 1999/9, whether the new business test is satisfied by a company in a particular case is a question of fact.

In respect of the new business test, TR 1999/9 provides at paragraph 68 that the word 'business' has a different meaning from the word 'business' in the same business test. Broadly, "...It is a reference to each of the different kinds or types of activities (if there be more than one kind or type of activity) comprised in the one business that is referred to in the same business test and is carried on by the taxpayer at the change-over..."

Paragraph 69 TR 1999/9 provides that an undertaking of a new kind has been commenced 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..."

However, this does not mean that a company cannot expand or develop. Paragraph72 of TR 1999/9 provide that, broadly, "...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 same business test...."

Second test - conclusion

As provided above, between the years 20YY and 20XX, the Joining Entity's business was predominantly an acquisition and distribution business, as its remaining manufacturing operations had either closed (Manufacturing Facility B) or were sold (Manufacturing Facility A) during 20YY. The Joining Entity had entered into new supply agreements with the acquirers of Manufacturing Facility A, in order to continue to provide the same products to its customers. In respect of the products previously manufactured at Manufacturing Facility B prior to 20YY, a supply agreement had also been secured such that the same type of products could continue to be provided to the Joining Entity's customers.

Prior to the sale of Manufacturing Facility A, eight of the Joining Entity's ten products lines had already been sourced through supply agreements. Once Manufacturing Facility A was sold, all ten product lines were sourced through supply agreements.

During the BCT period, the Joining Entity continued to provide the same product lines to largely the same customers, through the same distribution centres.

The closure of Manufacturing Facility B, the sale of Manufacturing Facility A and the transition to relying wholly on supply agreements, do not represent a new business of a kind it had not carried on before.

Accordingly, the new business test in subsection 165-210(2) will not apply.

Third test - new transactions test

Paragraph 165-210(2)(b) provides that a company does not satisfy the same business test if, at any time during the same business test period, it derives assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the test time. This is referred to as the 'new transactions test.'

TR 1999/9 relevantly provides at paragraphs 15 to 17 that the "...new transactions test includes all transactions entered into in the course of the company's business operations and not merely those that are 'isolated' or 'independent'. However, generally speaking, the new transactions test is not failed by transactions of a type 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..." and that 'transaction' includes "any operation or dealing from which income directly or indirectly flows or arises, and a company enters into a transaction for the purposes of the new transactions test if it engages or participates in it...."

Third test - conclusion

As set out above, in 20YY the Joining Entity entered into new supply agreements with the acquirers of Manufacturing Facility A in order to continue to provide the same products to its customers. In addition, in 20YY, the supply agreement between the Joining Entity and Supplier C was renewed for a ten-year term.

During the same time, the agreement between the Joining Entity and Supplier B was terminated. In the first half of 20XX, the Joining Entity entered into an agreement with Supplier D.

The transactions that the Joining Entity entered into during the BCT period were transactions of a type that could have been entered into ordinarily and naturally in the course of the business operations carried on by the Joining Entity before the test time.

As such, the new transactions test in subsection 165-210(2) will not apply.

Integrity rule

In respect of the integrity rule in subsection 165-210(3), paragraph 19 of TR 1999/9 relevantly states the "...anti-avoidance provisions apply where the purpose, or one of the purposes, of the company in commencing to carry on the business or entering into the transaction was the purpose of enabling the company to take into account prior year losses..."

As concluded above, the Joining Entity did not enter into any new business of a kind it did not carry on before the test time or any new transactions of a kind it had not entered into in the course of carrying on its business operations before the test time.

As such, the integrity rule at subsection 165-210(3) will not apply.

Same business test - conclusion

On the facts of the scheme, it is considered that throughout the BCT period the Joining Entity carried on the same business as it carried on immediately before the test time.

Accordingly, the Joining Entity passes the BCT test at section 165-210 in respect of the tax losses incurred in the year 20YY.

As the BCT is passed, the losses incurred by the Joining Entity for the year 20YY can be transferred to the Head Entity as the head company of the Head Entity TCG.

Question 2

If the same business test of the modified business continuity test is not satisfied under Question 1, will tax losses incurred by the Joining Entity for the year 20YY satisfy the similar business test of the modified business continuity test in section 707-125 of the Income Tax Assessment Act 1997, so that they can be transferred to Head Entity as the head company of the Head Entity income tax consolidated group?

As the same business test of the modified business continuity test is satisfied under Question 1, a ruling on the similar business test of the modified business continuity test in section 707-125 of the ITAA 1997 is not required

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