Edited version of private ruling

Authorisation Number: 1011645030210

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Ruling

Subject: Same Business Test

What this ruling is about:

Will Company A satisfy the same business test under section 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997) for the year ended 30 June 2011 such that it is able to deduct some or all of the tax loss made in the income year ended 30 June 2009 pursuant to section 36-17 of the ITAA 1997?

Ruling:

Company A will satisfy the same business test under section 165-210 of the ITAA 1997 for the income year ended 30 June 2011 such that it is able to deduct some or all of the tax loss made in the income year ended 30 June 2009 pursuant to section 36-17 of the ITAA 1997.

Year(s) of income or period(s) to which this ruling applies:

Year ended 30 June 2011

The scheme that is the subject of the ruling:

Company A is an Australian resident company.

During the income year ended 30 June 2009, Company A paid royalties to Company B for the use of its intellectual property which Company A used to manufacture and sell widgets.

Company A came into being after 1 July 2008 and incurred a tax loss for the income year ended 30 June 2009 for the manufacture and sale of widgets.

Company A's total assessable income will exceeds its total deductions (except tax losses) for the year ended 30 June 2011.

During the income year ended 30 June 2011, Company A purchased the intellectual property that it previously licensed. Royalty payments following the purchase of the intellectual property will cease.

Without taking into account the acquisition of the intellectual property, for the whole income year ending 30 June 2011, Company A will continue to manufacture and sell widgets in the same way as it did immediately before 30 June 2009.

Company A is unable to demonstrate that the COT is satisfied for any period from when it came into being.

Division 166 of the ITAA 1997 does not apply to Company A.

Relevant provisions:

Income Tax Assessment Act 1997 Subdivision 36-A

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 Section 165-12

Income Tax Assessment Act 1997 Subsection 165-12(1)

Income Tax Assessment Act 1997 Subsection 165-12(2)

Income Tax Assessment Act 1997 Subsection 165-12(3)

Income Tax Assessment Act 1997 Subsection 165-12(4)

Income Tax Assessment Act 1997 Section 165-13

Income Tax Assessment Act 1997 Subsection 165-13(2)

Income Tax Assessment Act 1997 Subdivision 165-E

Income Tax Assessment Act 1997 Section 165-210

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

Income Tax Assessment Act 1997 Paragraph 165-210(2)(a)

Income Tax Assessment Act 1997 Paragraph 165-210(2)(b)

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

Income Tax Assessment Act 1997 Division 166

Explanation: (This does not form part of the notice of private ruling)

All subsequent legislative references in the Reason for decision are to the ITAA 1997.

Deducting prior year losses

The deductibility of carry forward losses is governed by subdivision 36-A.

Section 36-17 allows a corporate tax entity to deduct a tax loss in a later income year.

Item 2 in table 2 of section 36-25 sets out special rules for deducting tax losses which are known as the continuity of ownership test (COT) and same business test (SBT). It also refers to Subdivision 165-A.

Section 165-10 states that a company cannot deduct a tax loss unless either:

(a) it meets the conditions in section165-12 (which is about the company maintaining the same owners); or

(b) it meets the conditions in section165-13 (which is about the company satisfying the same business test).

As it is not practicable for Company A to show that it meets the conditions in section165-12 for any period from when it came into being, Company A must satisfy the SBT to be able to deduct the tax loss made in the year ended 30 June 2009 (section 165-13).

Subsection 165-13(2) states that the company must satisfy the *same business test for the income year (the same business test period). Apply the test to the *business the company carried on immediately before the time (the test time) shown in the relevant item of the table.

Since Company A came into being during the loss year (year ended 30 June 2009) and it is not practicable for Company A to show that it has maintained the same owners for any period, the test time, in accordance with subsection 165-13(2) at item 3, is the end of the loss year being 30 June 2009.

Subsection 165-13(2) refers to Subdivision 165-E for the SBT.

Elements of the SBT

To satisfy the SBT, Company A must be able to satisfy a positive test, 2 negative tests and an anti-avoidance tests:

A positive test - 'the same business test' - the company must carry on the same business that it carried on immediately before the SBT test time (subsection 165-210(1));

A negative test - 'the new business test' - the company must not derive assessable income from carrying on a business of a kind that it did not carry on before the SBT test time (paragraph 165-210(2)(a));

A further negative test - 'the new transaction 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 SBT test time (paragraph 165-210(2)(b)); and

'the anti-avoidance test' - the company did not commence certain business activities before the test time for the purpose of satisfying the SBT (subsection 165-210(3)).

The key tests which determine whether Company A satisfies the SBT are the first three tests outlined above. Company A does not breach the anti-avoidance test in subsection 165-210(3) as it did not carry on any activities or businesses just prior to the test time for the purposes of satisfying the same business test in section 165-210. Company A's business activities have always been as a manufacturer and seller of widgets.

The positive test - subsection 165-210(1)

Subsection 165-210(1) states:

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.

The positive limb of the SBT requires a comparison of the business carried out throughout the SBT period (year ended 30 June 2011), with the business carried on immediately before the SBT test time (30 June 2009) (subsection 165-210(1)). To satisfy the SBT, Company A must carry on the same business throughout the year in which the loss is deducted (the SBT period), being the year ended 30 June 2011, as it carried on immediately before the test time (the SBT test time), being 30 June 2009.

The Commissioner's views of the meaning of 'same' are set out in Taxation Ruling TR 1999/9. Paragraph 8 states that 'same business' means the business of the company as an entirety, or its 'overall business'.

Paragraphs 38 to 40 of TR 1999/9 discusses situations where there have been changes in activities. Paragraph 38 explains that the same business:

…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 explains further that:

Mere expansion or contraction of the taxpayer's business may not result in the change in the identity of the business carried on by the taxpayer.

However, paragraph 40 states:

.. 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.…Moreover, the evolution of a business is not necessarily the same as mere expansion….

The business carried on immediately before the SBT test time was the manufacture and sale of widgets. Company A carried out the manufacture and sale of widgets under a licence agreement.

The Australian intellectual property rights which Company A will purchase during the year ended 30 June 2011 are the rights which Company A have been using in its business immediately before 30 June 2009. As owner of the Australian intellectual property rights, Company A will use these rights in the same way as it did prior to purchasing them, in particular, immediately before 30 June 2009.

With taking into account the purchase of the Australian intellectual property, Company A's business activities for the whole year ended 30 June 2011 will continue to be the manufacture and sale of widgets.

Company A's business for the purposes of the SBT are the same throughout the SBT period (year ended 30 June 2011) as they were immediately before the test time (30 June 2009) (subsection 165-210(1)). Therefore, the purchase of the intellectual property rights will not result in Company A ceasing to carry on the same business as it did before the test time.

The negative tests - paragraphs 165-210(2)(a) and (b)

This test requires Company A to not, at any time, during the income year ended 30 June 2011 derive assessable income from a business of a kind or a transaction of a kind that it did not carry out before 30 June 2009 (new business test and new transaction test).

Paragraph 14 of TR 1999/9 states the following in relation to 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.

Paragraph 15 of TR 1999/9 the Commissioner makes the following comments about the new transactions test:

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 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.

With taking into account the purchase of the Australian intellectual property, the revenue to be derived by Company A during the income year ended 30 June 2011 will be from the same sources as was derived in the income year ended 30 June 2009. Company A will have derived revenue from the same business activities and from the same customer base in both income years. The purchase of the intellectual property will not cause Company A to fail the new business or the new transaction tests.

Conclusion

Company A will satisfy the same business test under section 165-210 for the year ended 30 June 2011 such that it is able to deduct some or all of the tax loss made in the income year ended 30 June 2009 pursuant to section 36-17 of the ITAA 1997.