Edited version of private ruling

Authorisation Number: 1011762709627

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Ruling

Subject: Same business test

Question

Will the purchase of land cause the company to fail the 'new transaction test' set out in Paragraph 165-210(2)(b) of the Income Tax Assessment Act 1997(ITAA 1997) where all or part of the land is subsequently leased to an unrelated third party who is not the vendor?

Answer:

Yes

This ruling applies for the following period:

Income year ended 30 June 2010

Income year ended 30 June 2011

Income year ended 30 June 2012

Income year ended 30 June 2013

Income year ended 30 June 2014

Income year ended 30 June 2015

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· your previous private ruling

· your email requesting a further ruling, amending the facts of the previous private ruling in respect of the proposed lease.

The circumstances of the lease now include the circumstances where all or part of the land is leased to an unrelated third party, who is not the vendor, after the purchase of the land is complete.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 165-10.

Income Tax Assessment Act 1997 Section 165-210.

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

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

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

Income Tax Assessment Act 1997 Subsection 165-210(3).

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Section 165-10 of the ITAA 1997

A company cannot deduct a tax loss unless either:

(a) it meets the conditions in section165-12 of the ITAA 1997 (which is about the company maintaining the same owners); or

(b) it meets the conditions in section165-13 of the ITAA 1997 (which is about the company carrying on the same business).

Subsection 165-210(1) of the ITAA 1997

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.

Subsection 165-210(2) of the ITAA 1997

However, the company does not satisfy the same business test if, at any time during the same business 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.

Subsection 165-210(3) of the ITAA 1997

The company also does not satisfy the same business test if, before the test time, it:

(a) started to carry on a business it had not previously carried on; or

(b) in the course of its business operations, entered into a transaction of a kind that it had not previously entered into;

(c) and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the same business test period the same business as it carried on immediately before the test time.

Paragraph 165-210(2)(b) of the ITAA 1997 - New Transaction Test

The new transactions test requires that the company does not, at any time, during test period derive assessable income from a transaction of a kind that it did not carry on before the test time.

Taxation Ruling TR 1999/9 expresses the Commissioner's view on the same business test. 

In TR 1999/9 the Commissioner makes the following comments about the new transactions test:

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.

The word 'income' in subsection 165-210(2) does not include amounts that are 'de minimis'.

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.

Interpretation of the new transactions test is not without its difficulties. However, a purposive approach would regard it as applying to all transaction 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.

Therefore a business may be the same even through there have been some changes in the way in which it is carried on, provided the identity of the business is not changed.

TR 1999/9 goes on to state:

Where a taxpayer acquires or commences a new undertaking and amalgamates it in its overall business, the question posed by the legislation, in the Commissioners view, is whether the amalgamated business is the same business as the business carried on by the taxpayer immediately before the change-over the question involves considerations including, for example, the relative proportions of the undertakings, which, in some cases, could permit a company to pass the same business test not withstanding it had commenced an undertaking of a novel kind or character.

…the relative significance of what remained the same and what was novel would be particularly important.

The company is considering undertaking one of four activities on land purchased for the purposes of gaining unfettered access to that land. The purchase of the land and the use to which it is put will be considered separately in relation to the new transaction test.

Purchase of Land

The purchase of land by the company would be considered a normal and predictable activity to conduct for this type of company.

Irrespective of whether land had been purchased prior to the test time, it is a type of activity which could have been entered into before the test point in the normal and organic course of the company's business operations.

Furthermore, the decision to buy the land reflected the company's preference of gaining unfretted access to the land and the vendors' preference to sell the properties, rather than a desire a desire by the company to open up a new earning activity.

As such the purchase of the land in itself would not fail the new transactions test.

The use to which the land is put

Of consideration secondly is the use to which the land will be put whilst exploration activities are being conducted and prior to the development of a long-term mine.

The company is considering four activities in relation to the use of the land. They plans to either lease the land, hire contractors to work the land, make the land available for agistment or a combination of these activities. The previous private ruling addressed these activities and this ruling will examine the leasing of the property to an unrelated third party who is not the vendor subsequent to the purchase of the property.

The new transactions test was also considered by Sheppard J in J Hammond Investments Pty Ltd v. FC of T (1977) 31 FLR 349; (1977) 7 ATR 633; 77 ATC 4311 where he said:

Upon reflection I think it is correct, as both counsel concluded, that the word 'transaction' means 'dealing'.

One could imagine a situation where a company was taken over for the purpose of its tax losses in order to gain the benefit thereof, not for the purpose of offsetting income derived from the business against the losses of previous years, but for the purpose of offsetting against those losses an isolated or chance profit which might have been foreseen, perhaps a profit taxable by reason of the provisions of section 26(a) of the Act or some other income resulting in a chance or isolated profit or gain to the company.

The matters I have so far mentioned do not, however, in my opinion, take the matter sufficiently far to explain the presence in both provisions of the words, "in the course of its business operations". But I have come to the conclusion that there is a different type of transaction which probably does explain their presence. There are of course many receipts which are not properly described as being income from a business. There is an example of such a receipt in the present case. The partnership acquired a new building with a tenant in it, who remained in occupation for a short time after the acquisition. The sum of $160 was received by way of rental. It does not seem to me that that was income derived from the business being carried on by the partnership but it was certainly income derived from a transaction entered into in the course of the partnership's business operations. Many other transactions of this general type can be imagined.

Whilst, therefore, I do not regard the matter as free from difficulty, I have reached the conclusion that the second limb of the paragraph is not intended to refer to the daily transactions involved in carrying on a business but to transactions of an isolated and independent kind, which transactions have nevertheless arisen in the course of the taxpayer's business operations.'

This case is pertinent to the company's situation in that the circumstances around the purchase and use of the land arose as a result of them carrying out their core business activities and would not be considered extraordinary under the circumstances. However the subsequent use of the land is relevant in this situation and there were a number of scenarios considered by your previous private ruling with evident differences. This ruling is specific to leasing the property to an unrelated third party, who is not the vendor, subsequent to the sale.

J Hammond Investments accepted the rent payment arose in the course their business operations as the lease existed prior to the purchase. The rent was simply an incidental part of the purchase which did not affect their core business activity.

In the case of a leaseback to the previous owner, this is similar to the circumstances of J Hammond Investments because this leaseback would form a condition of the purchase or indeed be a 'sweetener' for the vendor to accept the purchase offer. Therefore the nature of this leaseback is closely associated with the purchase of the land and does not affect their business activity.

In the case of leasing the land subsequent to the property purchase to an unrelated third party who is not the vendor, there is no link to the purchase and no continuity of tenure. This new lease may readily be seen as being new discrete and independent business activities carried on directly by the company on a considerable scale.

In this situation, income is earned as the direct result of this distinct business activity undertaken in respect of the land, separate and unrelated to the core business activities. Consequently the leasing of the property to an unrelated third party subsequent to the purchase of the land is not disregarded and fails the new transaction test in this instance.