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Edited version of private advice

Authorisation Number: 1052098840781

Date of advice: 16 March 2023

Ruling

Subject: Tax losses - same business test

Question

Has Company A satisfied the same business test under section 165-210 of the Income Tax Assessment Act 1997 for the year ending 30 June 20XX in order to recoup its revenue losses incurred in prior income years, and transferred losses in the year ended 30 June 20XX which is subject to an available fraction?

Answer

Yes.

This ruling applies for the following period:

Year ended XX

The scheme commenced on:

XX

Relevant facts and circumstances

1.    Company A is the Australian head company of a tax consolidated group (TCG) with the subsidiary members.

2.    Company A carries on its business in its particular industry.

3.    Company A failed the continuity of ownership test (COT) on XX when the majority of shares in Company A were transferred by the original shareholders to different entities (their children's family trust) and its ultimate individual beneficial owners changed by more than 50%.

4.    Company A has been and is still trading under its current brand name which it is known by its customers and competitors.

5.    Company A does not own any trademarks, patents or other intellectual property.

6.    In the year ended 30 June 20XX, Company A had approximately XX employees with a wage expense of $XX.

7.    In the year ended 30 June 20XX, Company A had a similar size workforce and wage expense.

8.    Company A's leadership team has largely remained the same as it was in the year ended 30 June 20XX, including the directors, managing director, director of business operations.

9.    As of 30 June 20XX, the Company A TCG accrued carried forward revenue losses of $XX.

10.  The carried forward revenue losses include transferred losses, which is subject to an available fraction.

11.  To improve its cashflow and decrease its debt liabilities, Company A proposes to sell its assets to an unrelated third party.

12.  In the 20XX income year, Company A generated a profit of $XX from subletting its assets to other companies.

13.  As of 30 June 20XX, the accounting written down value of the assets Company A owns were estimated to be approximately $XX.

14.  On disposal of its assets, it is estimated that the Company A TCG would make a capital gain of approximately $XX in the year ended 30 June 20XX.

15.  Following the sale of its assets, to continue its business Company A plans to lease back these assets from the new owner to derive the same income.

16.  If the sale is successful, Company A would seek to recoup part of its carried forward revenue losses.

Business activities

17.  Immediately prior to Company A failing the COT on XX, its principal business activities consisted of the following:

18.  During the year of recoupment (the year ended 30 June 20XX), Company A's principal business activities comprised the following:

19.  Company A earns varying levels of revenue from its different business segments

20.  Traditionally, Company A provided its customers with services by undertaking a certain activity.

21.  However, in the 20XX year, Company A has limited the number of these activities due to its cash flow constraints and the associated costs involved.

22.  Consequently, Company A has commenced undertaking another activity to deliver the same services and products to its customers.

23.  Company A had previously undertaken this activity prior to the change in ownership, with the practice increasing over time.

24.  Company A still undertakes the original activity for its customers on an ad-hoc basis.

25.  For the 20XX income year, the majority of Company A's top ten customers have remained the same.

26.  In the year ended 30 June 20XX, Company A's business operations were funded by a number of ways.

27.  In the year ended 30 June 20XX, Company A's debt funding had increased.

28.  As the 20XX income year had not yet been completed, Company A used its 20XX income year data as a close approximation of its 20XX data for the purposes of this private ruling application. Company A did not anticipate any changes to its income, expenses and transactions for the year ended 30 June 20XX.

Relevant legislative provisions

Section 36-25 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 165-210 Income Tax Assessment Act 1997

Reasons for decision

The continuity of ownership or business continuity test

Section 36-25 of the ITAA 1997 sets out special rules about tax losses. Item 2 of table 2 of section 36-25 of the ITAA 1997 refers to the relevant tests in Subdivision 165-A of the ITAA 1997 and specifies the special rules around the situation where a company wants to deduct a tax loss where:

...It cannot do so unless:

Or the company has satisfied the business continuity test.

Subdivision 165-A of the ITAA 1997 stipulates the rules around the deductibility of tax losses of earlier income years.

Section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless either:

(a)  it meets the conditions in section 165-12 (the Continuity of Ownership Test); or

(b)  it meets the condition in section 165-13 (the Business Continuity Test).

Company A failed the COT on XXXX when the majority of shares in Company A were transferred by the original shareholders to their children's family trust. Therefore, Company A cannot deduct tax losses unless it satisfies the Business Continuity Test.

A company can satisfy the Business Continuity Test by satisfying one of two 'limbs' being:

Section 165-210 of the ITAA 1997 states:

The business continuity test - carrying on the same business

(1) A company satisfies the business continuity test if throughout the * business continuity 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 * business continuity test under this section if, at any time during the * business continuity 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 * business continuity test under this section 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 * business continuity test period the same business as it carried on immediately before the test time.

(4) So far as the *business continuity test under this section is applied for the purpose of Subdivision 165-B (which is about working out the taxable income and *tax loss for the income year of change of ownership or control), the company also does not satisfy the test if, at any time during the *business continuity test period, it incurs expenditure:

(a) in carrying on a *business of a kind that it did not carry on before the *test time; or

(b) as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time.

The business continuity test period and test time

To apply the business continuity test, including the SBT, the business continuity test period and the test time, need to be established. Subsection 165-13(2) of the ITAA 1997 defines that the business continuity test period for a company is the income year in which the company wishes to deduct tax losses of earlier income years. For present purposes, the business continuity test period is XXXX to XXXX, being the XXXX income year for Company A.

The table in subsection 165-13(2) of the ITAA 1997 defines the business continuity test time. Item 1 of the table states that, where practicable, the test time is the latest time that the company can show it has satisfied the continuity of ownership test in subsection 165-12(2), (3) and (4) of the ITAA 1997 (regarding the company maintaining the same owners). The latest time Company A is able to show that subsections 165-12(2), (3) and (4) of the ITAA 1997 were able to be met was XXXX. Therefore, the test time for the losses subject to this ruling is XXXX.

As previously stated, Company A failed the continuity of ownership test during the year ended 30 June 20XX. Company satisfies the same business test if throughout the 20XX income year it carried on the same business as it carried on immediately before XXXX.

The Commissioner's views concerning the application of the SBT and each of the sub-tests are set out in 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).

To satisfy the SBT, Company A must be able to satisfy the four sub-tests:

  1. The same business test (a positive test) - the company must carry on the same business during the business continuity test period that it carried on immediately before the test time. [1]
  2. The new business test (a negative test) - the company must not derive assessable income from carrying on a business of a kind that it did not carry on before the test time. [2]
  3. The new transaction test (a negative test) - the company must not derive assessable income, in the course of its business operations, from a transaction of a kind that it had not entered into before the test time.[3]
  4. The anti-avoidance test - the company did not commence certain business activities before the test time for the purpose of satisfying the SBT.[4]

These tests form a descending hierarchy that first tests the business of the company as an entirety (its 'overall business'), then the component undertakings or enterprises, if any, of that business and, finally, the individual transactions by which the business is carried on.[5]

Application of the SBT to tax consolidated and multiple entry consolidated (MEC) groups and identifying the 'business' for the purposes of the SBT

TR 1999/9 provides that the business of a company is identified, for the purposes of applying the SBT, by reference to the business activities carried on by that company and not by reference to the business activities carried on by a commonly owned or controlled group of companies to which that company belongs.[6]

However, Taxation Ruling TR 2007/2 Income tax: application of the same business test to consolidated and MEC groups - principally, the interaction between section 165-210 and section 701-1 of the Income Tax Assessment Act 1997 (TR 2007/2) sets out the Commissioner's views on how the SBT 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 and other matters.

Relevantly, paragraphs 12 and 14 of TR 2007/2 provides:

12. If in respect of a particular year of income the head company of a consolidated group has failed a relevant continuity of ownership test, then the same business test in section 165-210 will be relevant when calculating taxable income to determine the income tax liability of the head company. The single entity rule therefore will apply in this context (refer to section 701-1 and TR 2004/11).

...

14. Under the single entity rule of subsection 701-1(1), subsidiary members of a consolidated group are taken for the purposes of the same business test (section 165-210) (among other purposes), to be parts of the head company. In this context, 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.

In line with TR 2007/2, the principles contained in the TR 1999/9 apply to Company A as the head company of the Company A TCG and Company A is considered to be carrying on one overall business that consists of all the businesses carried on by its subsidiary members.

TR 1999/9 provides:

12. The requirement in section 165-13 and subsection 165-210(1)... is referred to in this Ruling as the 'same business test'. For the purpose of the same business test, a company is treated as carrying on one overall business at the change-over and during the period of recoupment since 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.

14. The requirement in subsections 165-13 and 165-210(2)... relating to 'business of a kind' is referred to in this Ruling as the 'new business test'. In the new business test, there is a reference to 'business of a kind' that the company did not carry on before the change-over. In the new business test the word 'business' has a different meaning from the word 'business' in the same business test; it refers to each kind of enterprise or undertaking comprised in the overall business carried on by the company at the change-over and during the period of recoupment. The new business test puts a limit on the type of expansion the company may undertake if it is to retain the benefit of accumulated losses; for the taxpayer may not engage in an undertaking or enterprise of a kind in which it did not engage before the change-over and still benefit from accumulated losses.

15. The requirement in section 165-13 and subsection 165-210(2)... relating to a 'transaction of a kind' not entered into in the course of the taxpayer's business operations is referred to in this Ruling as the 'new transactions test'. The new transactions test is directed to preventing the injection of income into a loss company that has satisfied the same business test and the new business test. 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 are usually unmotivated by tax avoidance, namely, transactions 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. Conversely, a transaction entered into during the period of recoupment and which is outside the course of the business operations before the change-over, or which is extraordinary or unnatural when judged by the course of the business operations before the change-over, is usually a transaction of a different kind from the transactions actually entered into by the company before the change-over.

TR 1999/9 further provides at paragraph 34:

34. The issue of fact to be determined in applying the same business test is to identify the business carried on by the taxpayer immediately before the change-over, and to determine whether the taxpayer carried on the same business at all times during the period of recoupment. In so identifying the business, it is relevant to examine every activity of the business, although those activities must be considered as a whole. However, 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. As Lord Donovan observed in J G Ingram & Son Ltd v. Callaghan:

'I doubt if one can as a rule segregate the various activities involved in carrying on a trade, select one of them as being of the essence, and then designate the one selected as the real trade. There is, I think, an organic unity about a trade which invalidates this sort of dissection, and I think Rowlatt J was saying much the same thing, though more incisively, when he remarked in Graham v. Greene that a trade differs from the individual acts which go to make it up, just as a bundle differs from odd sticks.'

And as Walton J concluded in Rolls-Royce (Motors) Ltd v. Bamford:

'[I]t follows from this that "the essence of the trade"... comprises every activity which goes to constitute that trade. Or, put in another way, however the trade of [the taxpayer at the change-over] is to be defined, it includes the activities, whatever they were, all ultimately directed towards making the profits, whatever their actual result, in all its... divisions.'

SBT - first test: the same business test - subsection 165-210(1)

Paragraph 13 of TR 1999/9 states that with regards to 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 TR 1999/9 continues and clarifies that:

... 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.

In Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation [1971] HCA 17; (1971) 124 CLR 97 (Avondale Motors), the leading case on the application of the same business test, Gibbs J held that the 'same business' required that the taxpayer carry on the 'identical business' at all times during the period of recoupment rather than a business of the same or similar kind.

Furthermore, Gibbs J said at [12]:

'The question whether a company has commenced a new business or has continued an old business under different conditions is simply one of fact.'[7]

Furthermore, Gibbs J held the mere expansion or contraction of a taxpayer's business may not result in a change in the identity of the business carried on by the taxpayer:

'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...

Walton J in Rolls-Royce (Motors) Ltd v. Bamford 55 (1976) 51 TC 319 at 344, ruled that a 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. Walton J said:

'Doubtless the trade of the company would remain the same trade even though, as a result of organic growth in response to every factor which might influence it, the company adopted new compatible operations and discarded portions of its old.'

In TR 1999/9, the Commissioner considers what impact changes to an ongoing business may have on the satisfaction of the same business test. Paragraph 38 to 40 of TR 1999/9 provides:

38. ...this does not mean that the business carried on by the taxpayer during the period 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...

39. 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...

40. However, 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.

Furthermore, TR 1999/9 directs at paragraph 43:

43. 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...

Paragraph 60(c) of TR 1999/9 clarifies the difference between a change of business and a 'mere change in the process by which a business is carried on':

There is a distinction between a change of business and a 'mere change in the process by which [the business] is carried on' (see Avondale Motors[F99] and Case Y45; AAT Case,272[F100]).

The second kind of change does not, of itself, result in a taxpayer not satisfying the same business test. However, when a change in the taxpayer's business operations or processes affects the identification of the taxpayer's business by going beyond a mere change in the way in which the business is carried on, it is likely to result in a change in the business itself, e.g., Gordon & Blair Ltd v. IRC.

TR 1999/9 further addresses such changes at paragraph 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 103 (1968) 51 TC 319 at 346.

TR 1999/9, at paragraph 61 and 62, provides thirteen factors that would be relevant to consider and how they are to be weighted in applying the same business test in considering the case of a hypothetical manufacturer of widgets where there has been a change of ownership following a loss year.

Determining whether the taxpayer has carried on the same business at all times during the year of recoupment as the business the taxpayer carried on immediately before the change-over, means drawing an inference of fact after considering and weighing all the factors going to the matters listed below and any other relevant matters, and then attaching the appropriate weight to each factor, having regard to all the circumstances.

Each of the following matters would be relevant to consider although not necessarily significant in itself, where it is emphasised that the list below is not a checklist and not exhaustive:

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.

The Commissioner has compared the Company A business immediately before the test time to the Company A business during the continuity test period. With respect to Company A's circumstances, on the facts, the principal products and services offered by Company A have remained the essentially the same from the test time and throughout the business continuity test period.

The Company A business has remained largely unchanged and has only experienced minor changes, such as:

The Commissioner is satisfied that even though there has been a small degree of change in the ways in which the Company A business is carried out from the test time to during the business continuity test period, the identity and the character of Company A's business has not altered. These changes were due to the organic growth and adoption of new compatible operations as well as the contraction of other activities on a minor scale. Ultimately, Company A carries on the same overall business as a telecommunications carrier and information and communications technologies provider.

Considering and weighing all the factors, and having regard to all the circumstances, it is considered that Company A satisfies the same business test at subsection 165-210(1) of the ITAA 1997.

SBT- Second test: The new business test

For the purposes of paragraph 165-210(2)(a) of the ITAA 1997, a company does not satisfy the same business test, if at any time during the 'business continuity test period', it derives income from a business of a kind it did not carry on before the 'test time'. This is referred to as the 'new business test'.

Paragraph 64 of TR 1999/9 provides that the new business test requires that the taxpayer company did not, at any time during the period of recoupment, derive income from a business of a kind it did not carry on before the change-over.

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.

Paragraph 68 of TR 1999/9 provides that the word 'business' in the new business test has a different meaning from the word 'business' in the same business test:

68. ... 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. 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.

The question of whether an undertaking of a new kind has been commenced is a question of fact as stated in paragraphs 69 and 70 of TR 1999/9:

69. ...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. ...That is, the taxpayer cannot add to its operations a business, that is, an undertaking or enterprise, of a kind it had not carried on before the change-over...

However, this does not mean a company cannot expand or develop. TR 1999/9 provides that the new business test permits a company to expand and develop during the period of recoupment, at paragraph 72:

... 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...

Paragraph 74 of TR 1999/9 further provides:

74. ...whether a new business, in the sense of a particular undertaking or enterprise, is of a different kind from the old undertakings or enterprises of a company, is a question of fact. In characterising an undertaking or enterprise, regard must be had to the undertaking or enterprise as a whole. A new undertaking or enterprise may be of a different kind from an old one, even though some or all of the transactions that it comprises or by which it is carried on, occurred in the old undertaking or enterprise because, in a different context, those transactions, considered with the other business operations of the taxpayer, may be such as to lend a different character to the undertaking or enterprise considered as whole.

With respect to Company A, between XXXX and XXXX, Company A's business operated within a certain industry. Company A began to sell services which utilise and leverage the services already offered by Company A. Furthermore, Company A begun to utilise other services to continue the provision its services to its customers.

These are considered to be within the same fields of endeavour as Company A was engaged in prior to failing the continuity of ownership test and are not considered to represent a new business of a kind Company A had not carried on before.

The legislative intent underlying the new business test is to prevent the injection of income into a loss company while permitting, within limits, the development and expansion of the overall business carried on by the taxpayer at the test time. The additional activities being undertaken by Company A during the business continuity test period are of the same kind as those Company A undertook at the test time and are a natural expansion of Company A's business and not a means of injecting income into a loss company.

As such, the Commissioner is satisfied that Company A is not undertaking any new business that it was not undertaking before the test time and Company A satisfies the new business test in paragraph 165-210(2)(a) of the ITAA 1997.

SBT - Third test: The new transactions test

The new transactions test is defined at paragraph 165-210(2)(b) of the ITAA 1997 where a company does not satisfy the same business test if, at any time during the business continuity 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.

Relevantly, TR 1999/9 provides at paragraphs 15 to 17:

15. ... the new transactions test is directed to preventing the injection of income into a loss company that has satisfied the same business test and the new business test. 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 are usually unmotivated by tax avoidance, namely, transactions 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. Conversely, a transaction entered into during the period of recoupment and which is outside the course of the business operations before the change-over, or which is extraordinary or unnatural when judged by the course of the business operations before the change-over, is usually a transaction of a different kind from the transactions actually entered into by the company before the change-over.

16. ... A transaction from which income is derived in the year of recoupment, which could have been entered into before the change-over in the course of the company's business operations, and which is neither extraordinary nor unnatural in the context of the business carried on by the company at the change-over, is generally a transaction of the same kind as transactions actually entered into by the company before the change-over.

17. In the new transactions test, 'transaction' refers to 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. The new transactions test is intended to extend to every means by which a company may derive income, including transactions of a passive or investment character. The words 'business operations' refer to everything that a company undertakes or does; together, the business operations constitute the business, meaning the overall business, of the company.

Further, paragraph 80 and 81 of the TR 1999/9 states:

80. ...Campbell J [in Fielder Downs (WA) Pty Ltd v. FC of T (1979) 45 FLR 242] treated the reference to 'transaction of a kind' in the new transactions test as being a reference to all transactions entered into in the course of the taxpayer's business operations, regardless of whether they were transactions entered into as part of the daily or regular conduct of the business carried on by the taxpayer or were transactions that were 'independent' or 'isolated' transactions, when judged by reference to the business carried on by the taxpayer. But, importantly, it would seem he did not regard transactions as being caught by the test if they were transactions that could have been carried on in the course of the company's operations prior to the change-over.

81. Interpretation of the new transactions test is not without its difficulties. However, a purposive approach would regard it as applying to all transactions entered into the course of the company's business operations and not merely those that are 'isolated' or 'independent'. But transactions that could have been entered into in the course of business operations before the change-over consistently with its ordinary course, are usually transactions of the same kind as those that actually had been entered into

Paragraph 86 of TR 1999/9 further explains:

86. The content of the word 'kind' in the new transactions test (and the new business test), when applied in a particular case, is to be derived from the course of the taxpayer's business operations before the change-over. A transaction that is entered into during the period of recoupment, which could have been entered into in the course of business operations before the change-over, and which is neither extraordinary nor unnatural in the context of the business carried on by the company at the change-over, is generally a transaction of the same kind as transactions actually entered into by the company before the change-over. Conversely, a transaction that is entered into during the period of recoupment, and which is outside the course of the business operations carried on before the change-over, or which is extraordinary or unnatural when judged by the course of the business operations before the change-over, or which otherwise could not have been entered into in the course of the taxpayer's business operations before the change-over, is a transaction of a different kind from the transactions actually entered into by the taxpayer before the change-over.

The planned sale of Company A's assets, comprising of the long-term leases, are intended to raise funds for working capital and to repay bank loans. Given that Company A will lease back the assets from the buyer and sublet back to its own current customers, it is not considered that these transactions are extraordinary or unnatural in the context of Company A's business circumstances.

It is considered that this transaction could have been naturally entered into in the course of the business operations of the taxpayer carried on before the change in ownership, had the sale been available, and which do not have the effect of changing the ordinary course or character of the company's operations

The planned sale of assets is seen as a natural contraction of Company A's existing business operations which were carried out at the time just before the change of ownership. Given the profits produced by Company A will be obtained in essentially the same manner, it will not change the character of the company. In essence, Company A will continue to derive revenue from the same type of transactions in the course of its business operations that it did at the test time as it continues to:

•         provide the same products to its customers as telecommunications carrier and service provider

•         sell to the same kinds of customers in the same locations and the same kinds of market segments

•         sell the same kinds of products

•         sell in essentially the same methods

As with the new business test, the legislative intent underlying the new transactions test is to prevent the injection of income into a loss company while permitting, within limits, the development of the overall business carried on by the taxpayer at the test time.

As such, Company A will satisfy the New Transactions Test in paragraph 165-210(2)(b) of the ITAA 1997.

SBT - Fourth test: The anti-avoidance test

In respect to the anti-avoidance rule in subsection 165-210(3) of the ITAA 1997, 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. This is so notwithstanding that, where there is more than one purpose, the tax avoidance purpose was not the dominant purpose of the company in commencing to carry on the business or enter into the transaction.

Paragraph 92 of TR 1999/9 further states that:

92. The anti-avoidance test is failed by a taxpayer where:

(a) before the change-over, the taxpayer commenced to carry on a business it had not previously carried on, or entered into, in the course of its business operations, a transaction of a kind it had not previously entered into; and

(b) the taxpayer commenced to carry on the business or entered into the transaction for the purpose (or for purposes that included the purpose) of satisfying the requirements of the 80E test, the 50D test, the 63C test, or the 80F test (as the case may be) in relation to a prior year tax loss, a current year loss, or a bad debt deduction or swap loss respectively ('specified purpose').

The anti-avoidance test is designed to capture situations where a company changes the nature of its business before a change of ownership, so that its business is the same as the business which it is intended to carry on after the change of ownership.

With respect to Company A, there is no evidence to suggest it had commenced carrying on any business or entered into any transactions it had not previously carried on or entered into immediately before the test time. There are no other issues present in the facts and circumstances of Company A which would suggest that it would fail the anti-avoidance test.

In applying the above, it is clear that Company A did not commence any businesses or enter into any transactions of a kind that had not been previously carried on for the purposes of satisfying the business continuity test under section 165-210 of the ITAA 1997 and as such, the anti-avoidance test does not have any application.

SBT - Conclusion

Company A has satisfied the requirements of:

As such, assuming there are no changes to Company A's business circumstances in the 20XX income year, it will satisfy all requirements of the SBT in section 165-210 of the ITAA 1997 and therefore would satisfy the business continuity test as provided by section 165-13 of the ITAA 1997. Thus, Company A would be able to deduct tax losses incurred in income years prior to and including the year ended 30 June 20XX for the income year ended 30 June 20XX to the extent that its total assessable income exceeds its total deductions (except tax losses) for that year.


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[1] Subsection 165-210(1) of the ITAA 1997.

[2] Paragraph 165-210(2)(a) of the ITAA 1997.

[3] Paragraph 165-210(2)(b) of the ITAA 1997.

[4] Subsection 165-210(3) of the ITAA 1997.

[5] Paragraph 24 of TR 1999/9.

[6] At paragraph 57 & 58.

[7] 31 (1971) 124 CLR 97 at 104; (1971) 2 ATR 312 at 317; 71 ATC 4101 at 4105.

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