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Ruling

Subject: Same Business Test

Question 1

For the purposes of section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997), will A Pty Ltd satisfy the same business test (SBT) under Subdivision 165-E of the ITAA 1997 so that it can deduct its prior year tax losses from its assessable income, including capital gains made in its 2011 income year and expected to be made in its 2012 income year?

Answer

Yes.

Question 2

For the purposes of section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997), will A Pty Ltd satisfy the SBT under Subdivision 165-E of the ITAA 1997 so that it can deduct its prior year capital loss from the assessable capital gain made in its 2011 income year?

Answer

Yes.

This ruling applies for the following periods:

2011 income year

2012 income year

The scheme commences on:

1 January 2010

Relevant facts and circumstances

A Pty Ltd (A) is an Australian resident company for Australian income tax purposes.

A is an 'eligible Division 166 company' as defined under section 995-1 of the ITAA 1997.

A was owned indirectly by Y Ltd (Y).

A carried on a manufacturing business and operated two sites in its business.

A incurred tax losses and a capital loss from its manufacturing activities.

A decided to cease manufacturing and sell its de-commissioned plant and real estate, due to unprofitability.

After manufacturing ended, A undertook various activities to prepare these assets for re-sale.

In early 2010, A sold its de-commissioned plant to B, an unrelated third party.

In 2010, there was a takeover by TC Ltd such that A failed the continuity of ownership test (COT) in section 165-12 of the ITAA 1997.

A maintained substantial continuity of ownership, under section 166-5 of the ITAA 1997, up until the takeover by TC Ltd.

In 2010, A made a capital gain on the sale of Site 1 to C, an unrelated third party.

In 2011, A entered into negotiations to sell Site 2 to D, an unrelated third party, and expected to make a capital gain on the sale.

Relevant legislative provisions

Income tax Assessment Act 1997 section 165-13

Income tax Assessment Act 1997 Subdivision 165-E

Income tax Assessment Act 1997 Division 166

Income tax Assessment Act 1997 section 166-272

Reasons for decision

Due to a change in its ownership, A failed the COT in section 165-12 of the ITAA 1997 and therefore must satisfy the SBT under section 165-13 of the ITAA 1997 to deduct its prior year tax losses and capital loss.

Section 166-215 of the ITAA 1997 provides concessional tracing rules for an 'eligible Division 166 company' to satisfy the ownership tests in Subdivision 166-D of the ITAA 1997 so that the company does not have to trace through to the beneficial owners of the stakes.

Relevant shareholding details showed that A maintained substantial continuity of ownership up until the COT failure in April 2010 through stakes of less than 10% indirectly held in A, the loss company, as per section 166-230 of the ITAA 1997.

Section 166-5 of the ITAA 1997 provides as follows,

'Satisfies the same business test

166-5(5) However, if the company satisfies the *same business test for the income year (the same business test period), it is taken to have satisfied the condition in section 165-13.'

To determine the times to compare the business conducted by the company, for the purposes of the SBT, section 166-5(6) provides as follows

166-5(6)

Apply the *same business test to the *business that the company carried on immediately before the earlier of the following times (the test time):

(a) the end of the first income year;

(b) the first time in the test period that a *corporate change in the company *ends;

for which there is no *substantial continuity of ownership of the company as between the start of the *test period and that time.

Further, section 165-96 of the ITAA 1997 effectively operates to allow a net capital loss to be deducted against a net capital gain if Subdivision 165-A of the ITAA 1997 did not prevent its deduction had it been a tax loss.

Therefore, for its tax losses and capital loss, A must compare the business carried on immediately before the COT failure in April 2010 against the business it carried on during the year ended 31 December 2010 (the same business test period). For the balance of its tax losses, A must compare the business carried on immediately before the COT failure in April 2010 against the business it carried on during the year ended 31 December 2011.

The Privy council considered the meaning of the word 'business' in American Leaf Blending Co Sdn Dlvd v Director General of Inland Revenue [1979] AC 676, in which Lord Diplock found,

'in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business'.

The above case has been cited with approval in a number of Australian tax cases, (Visy Industries USA P/L v Commissioner of Taxation [2011] FCA 1065, BHP Billiton Finance Ltd v Commissioner of Taxation [2009] FCA 276).

Therefore, it is considered that the taxpayer's business in both 2010 and 2011 was the sale of its remaining plant and property for the purpose of re-sale at a profit, as its earlier business of manufacturing ceased prior to 2010.

Subsection 165-210(1) of the ITAA 1997 is met because there was a business before the COT failure in April 2010, as described above, and that same business continued to be carried on after the takeover in both the 2010 and 2011 years. Subsection 165-210(2) of the ITAA 1997 does not apply because A has not undertaken a business of a kind that it did not carry on before the takeover, nor has it earned assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the takeover. Also, subsection 165-210(3) of the ITAA 1997 does not apply as no new business was started.

Therefore, it is considered that A meets the SBT and can deduct its tax losses and capital loss.