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Ruling

Subject: Modified Same Business Test

Question 1

In respect of tax losses incurred by Subco Group in the year ended 30 June 2008, did Sub Co. Group satisfy the modified same business test under section 707-125 of the Income Tax Assessment Act 1997 (ITAA 1997) such that it was able to transfer the losses to Holding Co. as the head company of the consolidated group at the joining time?

Answer

Yes. In respect of tax losses incurred by Sub Co. Group in the year ended 30 June 2008, Sub Co. Group satisfied the modified same business test under section 707-125 of the ITAA 1997 such that it was able to transfer the losses to Holding Co. as the head company of the consolidated group at the joining time.

Question 2

In respect of tax losses incurred by Sub Co. Group in the year ended 30 June 2009, did Sub Co. Group satisfy the modified same business test under section 707-125 of the ITAA 1997 such that it was able to transfer the losses to Holding Co. as the head company of the consolidated group at the joining time?

Answer

Yes. In respect of tax losses incurred by Sub Co. Group in the year ended 30 June 2009, Sub Co. Group satisfied the modified same business test under section 707-125 of the ITAA 1997 such that it was able to transfer the losses to Holding Co. as the head company of the consolidated group at the joining time.

This ruling applies for the following period:

1 January 2010 to 31 December 2010

The scheme commenced on:

1 July 2007

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.

Holding Co. is the head company of the Holding Co. Australian income tax consolidated group (Holding Co. group) in Australia. Until the purchase of Sub Co. group, the Holding Co. group included only Holding Co. and another company.

Sub Co. Group

Sub Co. Group manufactures and distributes industrial motors, blower systems, and industrial metal products. Via subsidiary companies it has operations in Australia and overseas

Sub Co. Group has a 30 June year end for income tax and financial reporting purposes. With effect from 1 January 2007, Sub Co. and its wholly-owned Australian resident subsidiaries elected to form the Sub Co. group Australian income tax consolidated group.

Immediately prior to the joining time (i.e. Date xx 2010), the following entities were members of the Sub Co. Group: companies A, B, C, D, and E.

Immediately prior to the joining time, Sub Co. also held 95% of the issued shares in company F. As a result company F was never a subsidiary member of the Sub Co. Group for Australian income tax purposes.

The Acquisition of Sub Co. Group by Holding Co.

At the joining time, Holding Co. acquired 100% of the issued shares in Sub Co. Sub Co. was the head company of the Sub Co. Group. Holding Co. is the head company of the Holding Co. group. As a result of the acquisition by Holding Co., Sub Co. and all of its wholly-owned Australian resident subsidiaries joined the Holding Co. group.

On the same day, Holding Co. also acquired the remaining 5% of the issued shares in company F (which were never previously held by Sub Co.). The remaining 95% of the issued shares in company F were already held by Sub Co. when it joined the Holding Co. group. As a result of the acquisition by Holding Co., company F joined the Holding Co. group.

Sub Co. became a member of the Holding Co. group on date xx 2010 (being the completion date of the acquisition by Holding Co. of 100% of the ordinary shares in Sub Co. pursuant to the Share Sale and Purchase Agreement). This is taken to be the "joining time" for the purposes of applying Subdivision 707-A.

The change of ownership in Sub Co. at the joining time caused the conditions in section 165-12 of the ITAA 1997 not to be satisfied in respect of the losses for the years ended 30 June 2008 and 30 June 2009. That is, the change of ownership caused a failure of the continuity of ownership test ("the COT").

Up until the change of ownership in Sub Co. at the joining time of date xx 2010 (which resulted in a failure of COT), a prior COT failure has not occurred during any of the income years in which the losses were incurred by Sub Co.

Tax losses of Sub Co.

At the joining time, Sub Co. had the following carried forward tax losses incurred in financial year ended 30 June 2008 (2008 losses) and tax losses incurred in financial year ended 30 June 2009 (2009 losses).

The business of Sub Co. group just before 30 June 2008

Just before 30 June 2008, the business of Sub Co. Group comprised the following operational divisions:

Company D Division: This division manufactured components for both electric motors and other industrial products. It had operations in certain Australian states. The operations of company D division comprised:

· the manufacture of laminations for the electric motor industry in Australia;

· steel pressing of industrial components and aluminium die casting (pressure and gravity die casting);

· the manufacture of enamelled copper winding wire for the electric motor industry in Australia. Company D acquired this copper wire manufacturing operation from an unrelated company before June 2008;

· other ancillary functions of CNC machining and powder coating; and

· customised tool design and manufacture.

Company E Division: This division manufactured and distributed fan and blower units for the heating and ventilation and air-conditioning industries. The fan manufacturing business of company E was integrated into the existing manufacturing businesses of Sub Co group to create a new integrated fan/motor product for sale. Just before 30 June 2008, revenue was generated in respect of the sale of this new integrated product.

Company B Division: This division conducted research and development activities and manufactured and sold electric motors and associated products for the Australian market and selected overseas markets.

Company C Division: This division was responsible for the distribution of electric motors and associated products to overseas markets.

Company F Division: This division was a distributor of industrial power transmission products, conveyor belting, electrical insulation material and copper magnet wire. The company G division is a sub-division of the company F division. The company G division supplies electrical insulating material, copper wire and specialty conductors.

In the year ended 30 June 2008 the Sub Co. Group group generated gross accounting operating revenue. The following table summarises the amount of gross operating revenue generated by each of the aforementioned divisions:

The business of Sub Co. group just before 30 June 2009

Just before 30 June 2009, the business of Sub Co. Group comprised the following operational divisions:

Company D Division: This division manufactured components for both electric motors and other industrial products. It had operations in NSW and South Australia. The operations of company D comprised:

· the manufacture of laminations for the electric motor industry in Australia (NSW);

steel pressing of industrial components and aluminium die casting (pressure and gravity die casting) in a certain Australian state.

· gravity die casting operations through an unrelated company, acquired by company D before June 2009;

· other ancillary functions of CNC machining and powder coating; and

· customised tool design and manufacture.

Company E Division: This division manufactured and distributed fan and blower units for the heating and ventilation and air-conditioning industries. The fan manufacturing business of company E was integrated into the existing manufacturing businesses of company A to create a new integrated fan/motor product for sale.

Company B Division: This division conducted research and development activities and manufactured and sold electric motors and associated products for the Australian market and selected overseas markets.

Company C Division: This division was responsible for the distribution of electric motors and associated products to overseas markets.

Company F Division: This division was a distributor of industrial power transmission products, conveyor belting, electrical insulation material and copper magnet wire. The company G division is a sub-division of the company F division. The company F division supplies electrical insulating material, copper wire and specialty conductors.

In the year ended 30 June 2009 the Sub Co. Group generated gross accounting operating revenue. The following table summarises the amount of gross operating revenue generated by each of the aforementioned divisions:

Just before 30 June 2009, the business of Sub Co. Group was identical to that described just before 30 June 2008 (through the five divisions described above) subject to the following events:

Sub Co. Group no longer carried on copper wire manufacturing activities. These activities were wound down by the company D division with production ceasing before June 2009;

The gravity die casting facility of the company D division was shut down prior to June 2009 and therefore, was not in operation just before 30 June 2009; and

The already existing gravity die casting activities of Sub Co. Group were expanded through the acquisition of the gravity die casting operation from an unrelated company by company D on prior to June 2009.

Further details are described below.

Winding down the copper wire manufacturing activities

Sub Co. Group, through company D, acquired the copper wire manufacturing operation in mid 2007 from an unrelated company. Sub Co. Group had originally sourced copper wire for use in the manufacture of its electric motors from the unrelated company. When the unrelated company indicated its intention to discontinue the manufacture of copper wire, Sub Co. Group purchased the unrelated company's copper wire operation in order to protect its supply lines.

Prior to June 2009, Sub Co. Group decided to wind down its copper wire manufacturing activities with a view to selling the business assets (e.g. plant and machinery) associated with these activities. Production of copper wire ceased the first half of 2009.

Closure of the gravity die casting facility

In first half 2009, company D, closed its gravity die casting facility in Australian State X. The gravity die casting operation was completely absorbed by company D's other gravity die casting facility This process involved an absorption of production capacity, as well as the relocation of physical assets.

The other plant had a gravity die casting operation that existed alongside the State X operation throughout the year ended 30 June 2009.

Acquisition of gravity die casting operation

In first half 2009, company D acquired the business of an unrelated company which was a gravity die casting business. The acquisition expanded company D's already pre-existing gravity die casting capabilities (referred to above). The acquisition of new business did not introduce any new service offerings or products to the existing gravity die casting operations of the Sub Co. Group.

The business of Sub Co. Group twelve months before acquisition by Holding Co. (i.e. Date xx 2009 to Date xx 2010)

The business of Sub Co. Group comprised the following operational divisions:

Company D Division: This division manufactured components for both electric motors and other industrial products. The operations of the division comprised:

the manufacture of laminations for the electric motor industry;

steel pressing of industrial components and aluminium die casting (pressure and gravity die casting);

gravity die casting operations acquired by company D in first half 2009;

other ancillary functions of CNC machining and powder coating; and

customised tool design and manufacture.

Company E Division: This division manufactured and distributed fan and blower units for the heating and ventilation and air-conditioning industries. The fan manufacturing business was integrated into the existing manufacturing businesses of Sub Co. Group to create a new integrated fan/motor product for sale.

Company B Division: This division conducted research and development activities and manufactured and sold electric motors and associated products for the Australian market and selected overseas markets.

Company C Division: This division was responsible for the distribution of electric motors and associated products to overseas markets.

Company F Division: This division was a distributor of industrial power transmission products, conveyor belting, electrical insulation material and copper magnet wire. The company G division is a sub-division of the company F division. The company G division supplies electrical insulating material, copper wire and specialty conductors.

In the period ended date xx 2010 the Sub Co. Group generated gross accounting operating revenue. Overall sales revenue had declined from the previous years due to the impact of the Global Financial Crisis. The following table summarises the amount of gross operating revenue generated by each of the aforementioned divisions:

Relevant legislative provisions

Income Tax Assessment Act 1997 Ch3-Pt3-5-Div165-SDiv165-E.

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 165-15.

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)(a).

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

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

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

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

Income Tax Assessment Act 1997 Ch3-Pt3-90-Div707-SDiv707-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 Paragraph 707-120(2)(a).

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

Income Tax Assessment Act 1997 Subsection 707-120(3).

Income Tax Assessment Act 1997 Section 707-125.

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

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Question 1

Summary

In respect of tax losses incurred by Sub Co. group in the year ended 30 June 2008, Sub Co. Group satisfied the modified same business test under section 707-125 of the ITAA 1997 such that it was able to transfer the losses to Holding Co. as the head company of the consolidated group at the joining time.

Detailed reasoning

General discussion of relevant law

Subdivision 707-A of the ITAA 1997 provides the rules for the 'transfer' of unutilised losses of a joining entity to a head company of a consolidated group. These rules apply to losses incurred after 30 June 1999.

Unutilised tax losses cannot be transferred unless the joining entity:

· satisfies either the continuity of ownership test (COT) in section 165-12 of the ITAA 1997 or the same business test (SBT) in section 165-13 of the ITAA 1997 as modified by the provisions of section 707-125 of the ITAA 1997, and

· does not fail the tainted change of control test in section 165-15 of the ITAA 1997.

Subdivision 707-A of the ITAA 1997 is applied to each tax loss that the joining entity seeks to transfer, separately, and not the total amount of all the tax losses carried forward at the joining time.

Where a joining entity has failed COT at the joining time, SBT must be passed in order for the unutilised losses to be transferred to the head company.

Same Business Test

The SBT is a defined term under section 995-1 of the ITAA 1997, which states that the SBT has the meaning given by Subdivision 165-E of the ITAA 1997, where section 165-210 of the ITAA 1997 provides that:

A company satisfies the same business test if throughout the same business SBT period it carries on the same business as it carried on immediately before the test time.

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.

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;

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.

Same Business Test Period (SBT Period)

The 'SBT period' is a defined term under section 995-1 of the ITAA 1997, which states that the SBT period has the meaning given by a number of sections.

The relevant section in relation to loss transfers on consolidation is section 707-125 of the ITAA 1997 which, at subsection 707-125(2) of the ITAA 1997 modifies the application of section 165-13 of the ITAA 1997. Section 707-125(2) of the ITAA 1997 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:

· the same business test-period (test-period) consisting of:

· the 'trial' year, and

· 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

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

The income year in subparagraph 707-125(2)(a)(ii) of the ITAA 1997, refers to the test time defined in section 165-13 of the ITAA 1997. For an entity that can identify when they last passed COT, subsection 165-13(2) of the ITAA 1997 identifies the test time as 'the income year which includes that time'. This income year will only be relevant to the SBT period if the year started before the 'trial year'.

The 'trial year' is the notional loss claim year adopted in transfer testing, and represents the equivalent of the recoupment period in the 'recoupment test'. Subsection 707-120(2) of the ITAA 1997 defines the 'trial year' as:

· starting at the latest of these times:

· the time 12 months before the joining time;

· the time the joining entity came into existence;

· the time the joining entity last ceased to be a subsidiary member of a consolidated group, if the joining entity had been a member of a consolidated group before the joining time but was not a member of the consolidated group just before the joining time; and

· ending just after the joining time.

For the 'trial year', it is assumed the amount of the loss that could be used is not restricted by the actual amount of income available at that time (subsection 707-120(1)(b) of the ITAA 1997). Additionally, subsection 707-120(3) provides:

When working out whether the joining entity carried on the same business throughout the trial year (or a period including the trial year) as it carried on at a particular time, assume that the entity carried on at and just after the joining time the same business that it carried on just before the joining time.

Effectively, any change in the joining entity's business activities at and just after the joining time is not relevant for 'transfer' testing.

Subsection 165-210(1) of the ITAA 1997 - 'same business'

The first element of the test examines the overall business being carried on. In this section reference to 'same' has been decided by the courts as meaning 'identical business' rather than of the same kind or similar kind (Avondale Motors (Parts) Pty Ltd v. FC of T (1971) 124 CLR 97; 45 ALJR 280; 2 ATR 312; 71 ATC 4101).

Taxation Ruling TR 1999/9 explains further at paragraph 13 that this does not mean identical in all respects: what is required is the continuation of the actual business carried on immediately before the test-time. A company may expand or contract, through adding new business or discarding old business, without necessarily ceasing to carry on the same business. Additionally, what remains the same may be relevant. Expansion or reduction of business activities, if carried to a sufficient extreme, is likely to amount to more than a 'mere change' and so may result in a change in the identity of the business (para. 40) The significance of what changes or remains the same is a question of fact and degree. As Dr Grbich said in Case Y45 AAT Case 7,272; 91 ATC 426 at 430:

'Differences in the nature of the business can eventually pass the point where a qualitative change in the nature of the business takes place. The issue is when that point is reached in a particular case.'

TR 1999/9 at paragraph 59 summarises that although various factors are relevant, a single factor or matter might be so important that it determines the issue. But usually, a combination of factors will be decisive.

Subsection 165-210(2) of the ITAA 1997 - 'new business' and 'new transactions'

The second element of the test requires that the company:

· has not, at any time during the test-period, derived assessable income from a business of a kind which it did not carry on before the test-time

· has not, at any time during the test-period, derived assessable income from 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(2)(a) and (b) of the ITAA 1997 (known as the new business test and the new transactions test respectively) allow a business to expand and develop, provided the activities by which it produces its income remain of the same kind. In the 'new business' and the 'new transactions' tests the word 'business' becomes more specific and refers to each of the different kinds or types of activities that form the overall business.

The meaning of 'of the same kind' is derived from the business operations before the test time. A business or transaction that is entered into during the test-period, and:

· which is outside the course of business operations carried on before the test-time, or

· which is extraordinary or unnatural when judged by the course of business operations before the test-time, or

· which otherwise could not have been entered into in the course of business operations before the test-time,

· is a business or transaction of a different 'kind' from those actually entered into before the test-time.

Paragraphs 70-72 of TR 1999/9 explain that the 'new business' test is intended to limit the expansion available under the same business test. Generally speaking, the new business test permits a company to expand or develop during the period of recoupment within the same fields of endeavour as it was engaged in before the test-time.

In the 'new transactions' test, where a new transaction is considered 'of a different kind' from the transactions at the test time the test will not be satisfied. 'Transaction', in this reference incorporates every means or event by which income is derived. The test looks at all transactions, not merely those that are 'isolated' or 'independent' (TR 1999/9 para.80). Derivation of small, insignificant amounts of income will not cause the company to fail the new business test or the new transactions test.

Applying the tests involves:

· identifying the nature of the business before the test-time, and

· the kinds of business operations, undertakings and transactions entered into (during the course of that business),

· from the test-time, to the point in the past where the business can no longer be described as 'the business carried on before the test-time' (TR 1999/9 para.88).

Subsection 165-210(3) of the ITAA 1997 - 'the anti avoidance provision'

Subsection 165-210(3) of the ITAA 1997 is a provision designed to prevent transfer of losses where the activities of the company are conducted with the intention of satisfying the SBT in anticipation of enabling transfer of a prior year loss.

Application of the law to your circumstances

Sub Co. Group incurred losses for the year ended 30 June 2008. As such the test time under paragraph 707-125(2)(b) of the ITAA 1997 is just before 30 June 2008.

Business just before 30 June 2008

The following is the Commissioners view of the business at the test time:

Just before 30 June 2008, the business of Sub Co. Group comprised the following operational divisions:

Company D Division: This division manufactured components for both electric motors and other industrial products. It had operations in various Australian States. The operations of company D division comprised:

the manufacture of laminations for the electric motor industry in Australia;

steel pressing of industrial components and aluminium die casting (pressure and gravity die casting);

the manufacture of enamelled copper winding wire for the electric motor industry in Australia. Company D acquired this copper wire manufacturing operation from an unrelated company in prior to June 2008;

other ancillary functions of CNC machining and powder coating; and

customised tool design and manufacture.

Company E Division: This division manufactured and distributed units for the heating and ventilation and air-conditioning industries. The fan manufacturing business of company E was integrated into the existing manufacturing businesses of Sub Co group to create a new integrated product for sale. Just before 30 June 2008, revenue was generated in respect of the sale of this new integrated product.

Company B Division: This division conducted research and development activities and manufactured and sold electric motors and associated products for the Australian market and selected overseas markets.

Company C Division: This division was responsible for the distribution of electric motors and associated products to overseas markets.

Company F Division: This division was a distributor of industrial power transmission products, conveyor belting, electrical insulation material and copper magnet wire. The company G division is a sub-division of the company F division. The company G division supplies electrical insulating material, copper wire and specialty conductors.

In the year ended 30 June 2008 the Sub Co group generated gross accounting operating revenue. The following table summarises the amount of gross operating revenue generated by each of the aforementioned divisions:

Business of Sub Co. group during the trial year

The trial year under subsection 707-125(2) of the ITAA 1997 is from Date W in 2009 to just after Date X 2010.

For the trial year, the business of Sub Co comprised the following operational divisions:

Company D Division: This division manufactured components for both electric motors and other industrial products. The operations of company D division comprised:

the manufacture of laminations for the electric motor industry in Australia;

steel pressing of industrial components and aluminium die casting (pressure and gravity die casting);

Gravity die casting operations acquired from an unrelated company in first half 2009;

other ancillary functions of CNC machining and powder coating; and

customised tool design and manufacture.

Company E Division: This division manufactured and distributed units for the heating and ventilation and air-conditioning industries.. The fan manufacturing business of company E was integrated into the existing manufacturing businesses of Sub Co. Group to create a new integrated product for sale.

Company B Division: This division conducted research and development activities and manufactured and sold electric motors and associated products for the Australian market and selected overseas markets.

Company C Division: This division was responsible for the distribution of electric motors and associated products to overseas markets.

Company F Division: This division was a distributor of industrial power transmission products, conveyor belting, electrical insulation material and copper magnet wire. The company G division is a sub-division of the company F division. The company G division supplies electrical insulating material, copper wire and specialty conductors.

In the period ended Date X 2010 the Sub Co. group generated gross accounting operating revenue. Overall sales revenue had declined from the previous years due to the impact of the Global Financial Crisis. The following table summarises the amount of gross operating revenue generated by each of the aforementioned divisions:

Changes to business operations from test time to the business operations during the trial year

Four events occurred which resulted in the business operations at the test time altering from the business operations during the trial year. These were:

Sub Co. ceased its copper wire manufacturing activities. These activities were shut down by the company D division with production ceasing on first half of 2009. Therefore this specific function was in operation at the test time and not in operation during the trial year;

A gravity die casting facility of the company D division was shut down on first half 2009. Therefore this specific function was in operation at the test time and not in operation during the trial year; and

The already existing gravity die casting activities of SubCo. Group were expanded through the acquisition of the gravity die casting operations from an unrelated company in first half 2009. Therefore this specific function was in operation during the trial year and not in operation at the test time.

The sale of depreciating assets and trading stock in relation to the copper wire manufacturing activities to an unrelated company in first half 2009. Therefore these transactions were undertaken during the trial year and not undertaken at the test time.

The effect of these four events is discussed in detail below:

Copper wire manufacturing.

In 2007 company D acquired the copper wire manufacturing operations from an unrelated company. The copper wire was used in the manufacture of electric motors by company D. The reason for the purchase of the copper wire manufacturing operations was that the unrelated company decided to discontinue the manufacture of copper wire and company D wanted to protect its supply of copper wire.

In first half 2009, Sub Co. group decided to wind down its copper wire manufacturing activities because suitable local and offshore suppliers were identified and a supply of copper wire was re-secured. The decision to once again outsource the supply of copper wire was regarded as a natural step in the evolution of the Sub Co. group business and as a means of reducing operating costs.

TR 1999/9 states at para. 38 that:

'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.'

The Ruling goes on to say at para 39 that:

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

In this instance the copper wire is a component of electric motors which company D manufactures. The change that has occurred is that the manufacture of the component has ceased and the supply has been outsourced - a position the company was in prior to 1 July 2007. Although there has been a change in the manufacturing process it is not considered to be so significant as to cause the company to fail the same business test.

At para 61(c) of the Ruling it is acknowledged that:

'…The outsourcing of some components in a manufacturing business might well be a natural step in turning a loss company's business into a profitable one which, in its context, has no particular significance for the same business test…'

Accordingly, the outsourcing of the copper wire operations does not change the essential character of, or constitute a sudden or dramatic change in the business conducted by Sub Co. group and therefore does not cause Sub Co. group to fail the modified same business test.

The gravity die casting facility

The gravity die casting facility of the company D division was shut down first half 2009 in order to reduce operating costs. The gravity die casting plant was absorbed by company D's gravity die casting plant in another state which has been in operation for many years. The closure of the facility did not represent a cessation of the gravity die casting business operations of the Sub Co. group.

In this instance, although the gravity die casting operations were consolidated from two locations to one, the company still carried on the same activity. The change in location had little or no overall effect on the manufacturing process.

As pointed out in Avondale Motors (Parts) Pty Ltd v. FC of T (1971) 124 CLR 97; 45 ALJR 280; 2 ATR 312; 71 ATC 4101, there is a distinction between a change of business and 'a mere change in the process by which the business is carried on.'

The closure of one facility does not change the essential character of, or constitute a sudden or dramatic change in the business conducted by Sub Co. group and therefore does not cause Sub Co. group to fail the modified same business test.

The acquisition of gravity die casting operations

In first half 2009 company D acquired the operations of an unrelated company. The business was a gravity die casting business. As discussed above, company D at all times during the SBT period carried on gravity die casting operations.

According to para. 60(f) of Taxation Ruling TR 1999/9:

'The commencement or acquisition, by merger or otherwise, of new undertakings (including going concerns and similar or complementary undertakings) may cause a company to fail the same business test, e.g. if the result is to alter the character of the overall business: George Humphries & Co v Cook, Seaman v Tucketts Ltd'.'

Similarly, in Rolls-Royce Motors Ltd v Bamford (1976) 51 TC 319, Walton J (at 344) observed that:

There is all the difference in the world between an organic growth of trade and a sudden and dramatic change brought about by either the acquisition or loss of activities on a considerable scale.'

In this instance, the acquisition of the gravity die casting operations did not produce a sudden or dramatic change in the business carried on by company D. The acquisition of the business merely expanded the already existing gravity die casting operations of company D. It did not introduce any new service offerings or products to the existing gravity die casting operations.

The acquisition did not change the identity of the business carried on because during this period the company continued to operate as a manufacturer and distributor of electric motors and related industrial products and services.

Accordingly, the acquisition of the gravity die casting business does not change the essential character of, or constitute a sudden or dramatic change in, the business conducted by Sub Co group and therefore does not cause Sub Co. group to fail the modified same business test.

Sale of copper wire manufacturing depreciating assets and trading stock

Sub Co. group disposed of its copper wire manufacturing plant and equipment in the first half 2009 to an unrelated company and disposed of its copper wire manufacturing trading stock shortly after.

TR 1999/9 provides the following in respect of the new transactions test:

15. The requirement in section 165-13 and 165-210(2) (or the equivalent provisions in the 50D test (which includes subsection 165-210(4)), the 63C test and the 80F test) relating to a 'transaction of a kind' not entered into in the course of the taxpayer's business operations is referred to in this Ruling as the 'new transaction test'. The new transactions test is directed to preventing the injection of income into a loss company that has satisfied the same business test and the new business test. The new transactions test includes all transactions entered into in the course of the company's business operations and not merely those that are 'isolated' or 'independent'. However, 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 and 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 the change-over.

The content of the word 'kind' in the new transactions test and the new business test, when applied in a particular case, is to be derived from the course of the company's business operations before the change-over. A transaction from which income is derived during the period of recoupment, which could have been entered into before the change-over in the course of the company's business operation, 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 a transactions actually entered into by the company before the change-over.

The consolidated financial statements of the Sub Co. group for the years ended 30 June 2008 and 2009 demonstrate that Sub Co. group has previously disposed of plant and equipment and trading stock in the ordinary course of its business operations.

The Commissioner considers that the disposal of plant and equipment and trading stock during the trial year are transactions of a kind which have been entered into by Sub Co. group before the test time in the ordinary course of its business operations.

Therefore, the sale of depreciating assets and trading stock are not transactions which will cause Sub Co. group to fail the new transactions test under paragraph 165-210(3)(b) of the ITAA 1997.

Other changes

The Commissioner has not identified any other changes to the business conducted by Sub Co. group at the test time compared to the trial year.

Conclusion

The business conducted by the Sub Co. group during the trial year is the same as the business carried on at the test time, notwithstanding that there were minor variations to the functions of the company D Division and its contributions to the gross operating revenue.

Having reviewed the facts and analysis of changes provided by the Sub Co. group, the Commissioner is satisfied that the modified same business test under section 707-125 of the ITAA 1997 has been passed.

Question 2

Summary

In respect of tax losses incurred by the Sub Co. group in the year ended 30 June 2009, Sub Co. group satisfied the modified same business test under section 707-125 of the ITAA 1997 such that it was able to transfer the losses to Holding Co. as the head company of the consolidated group at the joining time.

Detailed reasoning

General discussion of relevant law

Refer to Question 1 for 'General discussion of relevant law'.

Application of the law to your circumstances

Sub Co. group incurred losses for the year ended 30 June 2009. As such the test time under paragraph 707-125(2)(b) of the ITAA 1997 is just before 30 June 2009.

Business just before 30 June 2009

The following is the Commissioners view of the business at the test time:

Just before 30 June 2009, the business of Sub Co. group comprised the following operational divisions:

Company D Division: This division manufactured components for both electric motors and other industrial products. The operations of company D division comprised:

the manufacture of laminations for the electric motor industry in Australia;

steel pressing of industrial components and aluminium die casting (pressure and gravity die casting);

Gravity die casting operations acquired by company D on in first half 2009;

other ancillary functions of CNC machining and powder coating; and

customised tool design and manufacture.

Company E Division: This division manufactured and distributed fan and blower units for the heating and ventilation and air-conditioning industries. The fan manufacturing business of company E was integrated into the existing manufacturing businesses of Sub Co. group to create a new integrated fan/motor product for sale.

Company B Division: This division conducted research and development activities and manufactured and sold electric motors and associated products for the Australian market and selected overseas markets.

Company C Division: This division was responsible for the distribution of electric motors and associated products to overseas markets.

Company F Division: This division was a distributor of industrial power transmission products, conveyor belting, electrical insulation material and copper magnet wire. The company G division is a sub-division of the company F division. The company G division supplies electrical insulating material, copper wire and specialty conductors.

In the year ended 30 June 2009 the Sub Co. group generated gross accounting operating revenue. The following table summarises the amount of gross operating revenue generated by each of the aforementioned divisions:

Business of Sub Co. group during the trial year

The trial year under subsection 707-125(2) of the ITAA 1997 is from Date W 2009 to just after Date X 2010.

For the trial year, the business of Sub Co. group comprised the following operational divisions:

Company D Division: This division manufactured components for both electric motors and other industrial products. The operations of company D division comprised:

the manufacture of laminations for the electric motor industry in Australia;

steel pressing of industrial components and aluminium die casting (pressure and gravity die casting);

Gravity die casting operations acquired by company D in first half 2009;

other ancillary functions of CNC machining and powder coating; and

customised tool design and manufacture.

Company E Division: This division manufactured and distributed fan and blower units for the heating and ventilation and air-conditioning industries. The fan manufacturing business of company E was integrated into the existing manufacturing businesses of Sub Co. group to create a new integrated fan/motor product for sale.

Company B Division: This division conducted research and development activities and manufactured and sold electric motors and associated products for the Australian market and selected overseas markets.

Company C Division: This division was responsible for the distribution of electric motors and associated products to overseas markets.

Company F Division: This division was a distributor of industrial power transmission products, conveyor belting, electrical insulation material and copper magnet wire. The company G division is a sub-division of the company F division. The company G division supplies electrical insulating material, copper wire and specialty conductors.

In the period ended Date X 2010 the Sub Co. group generated gross accounting operating revenue. Overall sales revenue had declined from the previous years due to the impact of the Global Financial Crisis. The following table summarises the amount of gross operating revenue generated by each of the aforementioned divisions:

Changes to business operations from test time to the business operations during the trial year

In respect of the losses incurred by Sub Co. group during the year ended 30 June 2008, four events occurred which resulted in the business operations at the test time altering from the business operations during the trial year.

The Commissioner addresses theses events below in respect of the losses incurred by Sub Co. group during the year ended 30 June 2009:

Sub Co. group ceased its copper wire manufacturing activities. These activities were shut down by the company D division with production ceasing in first half 2009. Therefore this specific function was not in operation at the 30 June 2009 test time and not in operation during the trial year;

The gravity die casting facility of the company D division was shut down in first half 2009. Therefore this specific function was not in operation at the 30 June 2009 test time and not in operation during the trial year; and

The already existing gravity die casting activities of Sub Co. group were expanded through the acquisition of the gravity die casting operations by company D on in first half 2009. Therefore this specific function was in operation at the 30 June 2009 test time and was in operation during the trial year.

The sale of depreciating assets and trading stock in relation to the copper wire manufacturing activities to an unrelated entity in first half 2009 respectively. Therefore these transactions were undertaken during the trial year and not undertaken at the 30 June 2009 test time.

Sale of depreciating assets and trading stock

As discussed at Question 1, the sale of depreciating assets and trading stock are not transactions which will cause Sub Co. group to fail the new transactions test under paragraph 165-210(3)(b) of the ITAA 1997.

Other changes

The Commissioner has not identified any other changes to the business conducted by Sub Co. group at the test time compared to the trial year.

Conclusion

The business conducted by the Sub Co. group during the trial year is the same as the business carried on at the test time, notwithstanding that there were minor variations to the functions of the company D Division and its contributions to the gross operating revenue.

Having reviewed the facts and analysis of changes provided by the Sub Co. group, the Commissioner is satisfied that the modified same business test under section 707-125 of the ITAA 1997 has been passed.