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Ruling

Subject: Same Business Test

Question 1

Can the rulee, which sold a non-core part of its business just after the start of the trial year, ignore this business when determining whether it has satisfied the same business test throughout the trial year pursuant to subsection 165-210(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and as modified by subsection 707-125(1) of the ITAA 1997, given that it had actively sought to sell this business for a considerable time prior to its sale?

Answer

No

This ruling applies for the following periods:

Year ending 31 December 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The rulee was the head company of a tax consolidated group whose main activity was providing engineering and related activities in Australia and overseas. The group also had a non core commercial activity within Australia.

The non core commercial business had not performed to the management expectation. During 2007 and 2008, the rulee sought to dispose of this business. Due diligence work was done and the sale agreement was executed in 2008-09 income year. The sale was settled in the following month and the business exited the group on the same day.

Until the settlement date, the rulee was required to ensure that the commercial activity was carried on in accordance with certain requirements and obligations, and that there was no change in operations in that period.

The discontinued activity contributed to 1.4% of the rulee's total revenue and employed 15% of the rulee's employees in Australia. As a result of the sale, there was almost 25% reduction in the rulee's total assets.

The rulee and its group joined another tax consolidated group. At the joining time, the rulee had carried forward losses. The rulee failed the continuity of ownership test due to the acquisition by the other consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 165-12

Income Tax Assessment Act 1997 Section 165-13

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

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 Subdivision 707-A

Income Tax Assessment Act 1997 Section 707-120

Income Tax Assessment Act 1997 Section 707-125

Income Tax Assessment Act 1997 Subsection 707-125(2)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Summary

The sale of the separate commercial activity resulted in the taxpayer ceasing to carry on part of its business. Accordingly the taxpayer has failed to satisfy the same business test.

Detailed reasoning

Subdivision 707-A contains the rules for the transfer of unutilised losses of a joining entity to a head company of the a consolidated group.

Section 707-120 sets out the conditions for the transfer of a loss from the joining entity to the head company of the joined group. A loss is transferred at the joining time to the extent that the loss could have been utilised by the joining entity for an income year consisting of the trial year. Subsection 707-120(2) provides that, generally, the trial year is 12 months preceding the joining time.

Subsection 707-125(2) modifies the same business test specified in section 165-13. Subsection 707-125(2) states:

'Work out whether the loss is transferred on the basis that section 165-13 required the joining entity to satisfy the *same business test for:

(a) the period (the same business test period) consisting of:

(i) the *trial year; and

(ii) 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

(b) the time (the test time) just before the end of the income year for which the loss was made by the joining entity.'

The same business test contained in Division 165 is applied for the purpose of determining whether a loss for an income year after 30 June 1999 which is made by a joining entity can be transferred from the joining entity to the head company of the joined group.

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

According to the Australian Concise Oxford Dictionary (Third Edition 1997), the word 'throughout' means right through, from end to end [of a period]. The word 'throughout' in subsection 165-210(1) means that it is not possible to exclude part of the period, however short, from the period covered by the same business test. It does not permit a number of days to be excluded from the same business test period.

Taxation Ruling TR 1999/9 sets out the Commissioner's views on the application of the same business test in relation to the relevant provisions.

Paragraph 13 of TR 1999/9 sets out the Commissioner's general view on whether the contraction or cessation of a particular activity will result in the business ceasing to carry on the same business. Paragraph 13 states:

'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. 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.'

Taxation Ruling TR 2007/2 confirms the application of the rules in TR 1999/9 to consolidated groups.

The taxpayer has identified certain activities as its core business. However, paragraph 34 of TR 1999/9 provides that to apply the same business 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. It is not appropriate to single out certain activities as the heart or core of the business, and identify it merely by reference to those activities.

Paragraph 42 of TR 1999/9 indicates that the discontinuance, whether by cessation or sale, of a significant part of the business carried on by a taxpayer is likely to result in the taxpayer not being able to satisfy the same business test. The relevant question is whether the discontinuance of an activity produces a change in the business conducted by rulee. This is a question of degree. The mere organic contraction of business activities may not result in a change of business. However, a sudden and dramatic change brought about by the loss of a business operation will result in a change in business.

Having regard to the value of assets and the number of people employed by the discontinued business activity, it is considered that it was a significant business activity. This activity ceased in early 2009 and was not carried on throughout the same business test period. It is not relevant that the sale of this business occurred after a long search for a buyer or that the sale was delayed. It is considered that a significant business activity was carried out by the taxpayer at the separate commercial activity until early 200Y. This activity ceased in early 200Y and was not carried on throughout the same business test period.

Accordingly, the disposal of the commercial activity resulted in a substantial business activity ceasing during the same business test period. Subsection 165-210(1) of the ITAA 1997 is therefore not satisfied throughout the same business test period.