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Ruling

Subject: Application of the Same Business Test

Question 1

In determining whether the tax loss of Group B can be transferred to the taxpayer under section 707-120 of the Income Tax Assessment Act 1997 (ITAA 1997), will a period of dormancy at the beginning of the same business test period prescribed by section 707-125 of the ITAA 1997 by itself cause the failure of the same business test in sections 165-13 and 165-210 of the ITAA 1997?

Answer

No.

Question 2

If the answer to question 1 is yes, are the part-year loss rules in section 165-20 of the ITAA 1997 available to determine whether the carry forward tax losses incurred by Group B for the period 31 October 2006 to 30 September 2007 can be transferred to the taxpayer pursuant to section 707- 120, having regard to section 707-125 of the ITAA 1997?

Answer

In view of the answer to question 1, this question does not have to be answered.

This ruling applies for the following period:

Substituted Accounting Period 1 October 2007 to 30 September 2008

The scheme commences on:

1 July 2006

Relevant facts and circumstances

The taxpayer is the head company of an income tax consolidated group.

In September 2008, the taxpayer acquired an entity which was also the head company of an income tax consolidated group (Group B).

Group B carried on a leasing business and has a substituted accounting period ending 30 September.

Group B was dormant at the beginning of the income year (the period 1 October 2006 to 30 October 2006) until it acquired XYZ Ltd, a company that operated a leasing business.

In May 2007, the continuity of ownership test was failed by Group B. Group B incurred a tax loss and relied on the same business test to be able to transfer its loss to the taxpayer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 165-12.

Income Tax Assessment Act 1997 Section 165-13.

Income Tax Assessment Act 1997 Section 165-15.

Income Tax Assessment Act 1997 Section 165-210.

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

Income Tax Assessment Act 1997 Subdivision 707-A.

Income Tax Assessment Act 1997 Paragraph 707-120(1)(a).

Income Tax Assessment Act 1997 Paragraph 707-120(1)(b).

Income Tax Assessment Act 1997 Subsection 707-120(2).

Income Tax Assessment Act 1997 Section 707-125.

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

All subsequent legislative references in the submission are to the Income Tax Assessment Act 1997.

Reasons for decision

Question 1

Subdivision 707-A allows a tax loss to be transferred to the head company of a consolidated or MEC group by a joining entity if, subject to the conditions stated in paragraphs 707-120(1)(a) and (b), the tax loss could have been utilised by the joining entity for an income year consisting of the trial year, as defined in subsection 707-120(2).

The joining entity would not be able to utilise the tax loss for an income year consisting of the trial year unless it:

· satisfies either the continuity of ownership test (COT) in section 165-12, or the same business test (SBT) in sections 165-13 and 165-210 (as modified by section 707-125), and

· does not fail the change of control test in section 165-15.

Insofar as the COT is concerned, Group B failed the COT. Accordingly, Group B can only deduct its tax loss, or transfer its tax loss under Subdivision 707-A, if the company satisfies the SBT in sections 165-13 and 165-210 (as modified by section 707-125).

Subsection 165-210(1) states that a company satisfies the SBT if throughout the same business test period it carries on the same business as it carried on immediately before the test time.

Modification of the test time and SBT period

Subsection 707-125(2) modifies the application of section 165-13 for the purposes of transferring tax losses incurred in income years starting after 30 June 1999 to a consolidated or MEC group. In those cases the SBT must be applied as if section 165-13 required the joining entity to satisfy the SBT 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 period of dormancy by Group B from 1 October 2006 to 30 October 2006 falls within the same business test period determined by subsection 707-125(2).

The taxpayer has stated that Group B carried on the leasing business. However, XYZ Ltd was the company that operated the leasing business in the group. Therefore, Group B was dormant between 1 October 2006 and 30 October 2006, until it acquired XYZ Ltd. The relevant question to determine is whether the period of dormancy prior to the commencement of any business activities by Group B will, of itself, result in Group B failing the SBT.

Taxation Ruling TR 1999/9 sets out the Commissioner's view on the application of the SBT. Relevantly, paragraphs 47 - 48 of TR 1999/9 provide that:

Business must continue from the change-over until the end of the period of recoupment

47. The existence of a period of 'dormancy' often raises an issue as to whether the business is truly still in existence, though greatly reduced in scale, or has actually ceased altogether. If, before the end of the period of recoupment, the taxpayer completely ceases to carry on the business it carried on immediately before the change-over, it necessarily fails the same business test. Any other business it thereafter carries on must be a new business that it has commenced after the cessation of the old business and, therefore, a different business from the business carried on before the change-over.

48. In Avondale Motors [Avondale Motors (Parts) Pty Ltd v FCT (1971) 124 CLR 97; 2 ATR 312, 71 ATC 4101], Gibbs J held the taxpayer company did not satisfy the same business test on the basis that prior to the change-over, the business activities of the company, which comprised dealing in motor vehicle spare parts and accessories, had ceased completely.

Similarly, paragraph 60(h) of TR 1999/9 states that where an entity's activities have wound down to the extent that justifies a finding of fact that the entity had ceased to carry on a business, either at the change of ownership or before or during the income year of recoupment, the entity does not satisfy the same business test.

This principle deals with the reverse situation, where an existing business became dormant, rather than the situation in this ruling where a dormant company begins to conduct a business.

It should be noted that satisfying the SBT depends on the facts of each individual case.

In the present case, the period between 1 October 2006 and 30 October 2006 was a period of dormancy because the business of leasing that was carried on by Group B only commenced when XYZ Ltd was acquired by Group B. During this period, Group B did not derive any income, or incur expenditure with the exception of establishment expenses. The only activity of Group B during the period from 1 October 2006 to 31 October 2006 was "getting ready" to acquire XYZ Ltd.

Having regard to the principles set out in TR 1999/9 and the events that transpired before and during the income year ended 30 September 2007, the period of dormancy at the beginning of that income year, from 1 October 2006 to 30 October 2006, will not of itself result in the failure of the SBT by Group B.