Edited version of private ruling

Authorisation Number: 1011778543355

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Application of the Same Business Test

Issue 1

Will the Commissioner confirm that, in accordance with sections 165-13 and 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997), the MEC Group, will not fail the same business test because of the proposed disposal of one of its divisions?

Answer

Yes

This ruling applies for the following periods:

Other/Substituted Accounting Period 1 January 2011 to 31 December 2011 (in lieu of income year ending 30 June 2011)

Other/Substituted Accounting Period 1 January 2012 to 31 December 2012 (in lieu of income year ending 30 June 2012)

Other/Substituted Accounting Period 1 January 2013 to 31 December 2013 (in lieu of income year ending 30 June 2013)

The scheme commenced on:

1 January 2011

Relevant facts and circumstances

Background

This private ruling relates to an arrangement whereby the head entity of a multiple entry consolidated group (MEC Group) proposes to dispose of one of its business operations.

The MEC Group has a number of income producing activities, however, it is predominantly known in Australia for X activities. The MEC Group intend to dispose of a small division of its business activities.

In the 2009 income year, the continuity of ownership test was failed by the MEC Group and the MEC Group has carried forward losses which it seeks to recoup in future years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 36-25

Income Tax Assessment Act 1997 Subdivision 165-A

Income Tax Assessment Act 1997 Subdivision 165-B

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 Subsection 165-210(1).

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

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

Reasons for decision

Issue 1

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

Will the Commissioner confirm that, in accordance with sections 165-13 and 165-210, the MEC Group, will not fail the same business test because of the proposed disposal of one of its divisions?

Yes. The Commissioner confirms that the MEC Group will not fail the same business test as a result of the proposed disposal of one of its divisions.

Detailed reasoning

Section 165-10 provides that a company cannot deduct a tax loss unless either it meets the condition in section 165-12 (which is about the company maintaining the same owners), or it meets the conditions in section 165-13 (which is about the company carrying on the same business).

The MEC Group failed the continuity of ownership test in the 2009 income year. Therefore, it can only carry forward losses if the company satisfies the same business test.

Subsections 165-210(1) and 165-210(2) include three tests, each of which must be satisfied by a company in order for the company to meet the requirements of section 165-13 and section 165-210. These requirements are referred to as the same business test.

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) sets out the Commissioner's views on the application of the same business test in relation to the relevant provisions.

Taxation Ruling TR 2007/2 Income Tax: the 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 the interaction between the consolidation rules and the operation of the same business test.

Paragraph 8 of TR 1999/9 provides that the same business in section 165-210 is satisfied by a company where at all times during the year in which it claims a deduction for a prior year loss:

· carried on the same business (meaning the business of the company as an entirety, or its 'overall business') that it carried on immediately before the change in the beneficial ownership of shares by reason of which it ceased to satisfy the continuing ownership and control requirements described in section 165-12;

· did not carry on any business (meaning a particular undertaking or enterprise) other than a business of a kind carried on before the disqualifying change as part of the overall business;

· only derived income from transactions of a kind that it had entered into in the course of the overall business before the change of ownership; and

· the anti-avoidance provisions in subsection 165-210(3) do not apply to the company.

In determining whether the MEC Group will satisfy the same business test, the activities of the company are considered in the context of looking at the business conducted by the company at all times during the same business test period (the year in which the company is seeking to recoup the losses) and immediately before the test time (when the ownership or control test was failed).

The first test which must be satisfied is found in subsection 165-210(1) of the ITAA 1997 and comprises a positive requirement that the company carry on at all times during the period of recoupment, the same business as the business it carried on at the change-over.

Avondale Motors (Parts) Pty Ltd v. FC of T (1971) 124 CLR 97; 45 ALJR 280; 2 ATR 312; 71 ATC 4101 (Avondale Motors) is the leading authority on the application of the same business test in section 80E of the Income Tax Assessment Act 1936. In Avondale Motors, Gibbs J held that the reference to "same business" in section 80E required that the taxpayer carry on the "identical business" at all times during the period of recoupment, rather than a business of the same kind or similar kind.

The decision in AAT case 7272 (1991) 22 ATR 3395; Case Y45 91 ATC 426 indicates that the discontinuance, whether by way of cessation or sale, of a significant part of the business carried on by the 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.

Paragraph 61 in TR 1999/9 contains a guideline on what factors need to be considered in applying the same business test. Having regard to the facts provided by the applicant we consider that the proposed disposal does not amount to a sudden and dramatic change of a considerable scale for the following reasons:

· the division proposed to be disposed of forms only a small part of the overall business (i.e small proportion of the gross turnover, fixed assets and staff employed by the MEC Group);

· the locations of this division are negligible compared to the rest of the MEC Group business;

· following the proposed disposal of this division, the changes to the products manufactured any changes to the MEC Group customer base will not be considerable; and

· the change to the goodwill of the MEC Group is unlikely to be considerable.

On this basis, it is considered that the MEC Group will carry on the same business that it carried on before the test time upon the disposal of this division.

It is also necessary to consider the new business and new transaction tests contained in paragraphs 165-210(2)(a) and (b).

The new business test puts a limit on the type of expansion that the group may undertake if it is to retain the benefit of accumulated losses. In order for the head company to benefit from accumulated losses, it must not derive assessable income from an enterprise or undertaking of a kind that it is not treated as having been engaged in before the test time (Paragraph 67 of TR 2007/2).

In this Ruling, as the MEC Group proposes to dispose of a part of their business, this is not considered to be a business of a kind that it did not carry on before a specific date.

Paragraph 86 of TR 1999/9 states that "a transaction 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."

Based on the facts, the proposed disposal of one division would not be considered to be extraordinary or unnatural in the course of business operations carried on by the MEC Group. In these circumstances, the proposed disposal of the ready-made product division is not considered to be a transaction of a different kind to those entered by the group before the test time.

Further, subsection 165-210(3) provides the anti-avoidance test and states:

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.

According to the facts in the present case, the MEC Group did not commence any businesses or enter into any transactions of a kind that had not been previously carried on for the purpose of satisfying the same business test.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if a taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

The application of Part IVA to the arrangement we were asked to rule on, or to an associated or wider arrangement of which that arrangement is part, has not been fully considered.

To rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.