Edited version of your private ruling

Authorisation Number: 1012105490471

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Ruling

Subject: Same business test

Question

Will providing the 'proposed service' outlined in the facts of this private ruling cause the company to fail the same business test due to the application of subsection 165-210(2) of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period

The year ended 30 June 2012

The year ended 30 June 2013

The year ended 30 June 2014

The year ended 30 June 2015

The year ended 30 June 2016

The scheme commenced on

1 July 2011

Relevant facts

The company's business prior to the proposed transaction

1. The company was incorporated in 1990's. In the late 1990's the company started operating an asset. The company doesn't resell or trade the products but provide a range of services.

2. The company incurred tax losses in the income years ended 31 December 2001; 31 December 2002; 31 December 2003 and 30 June 2005. As at 30 June 2011, tax losses incurred by the company in these years were available to claim as a (carry forward) tax loss in the year ended 30 June 2012 (and future years) subject to the Continuity of Ownership Test (COT) or the Same Business Test.

3. The company failed the COT at some point during the 2000 calendar year; and again during the 2004 calendar year.

4. The company's business during the period from incorporation to 2004 was as follows:

§ The company owned and maintained the asset. The company had the responsibility for the management of core business functions relating to the asset

§ The company derived revenue from:

o transportation of products using the asset

o undertaking construction of customer specific works

o operating and maintaining customer specific works, and

o minor interest income.

§ The company was either the holder of, or sublicensed all required licences and access rights from the owner of the asset to carry out the role as operator of the asset.

§ The company was responsible for entering into all commercial contracts with customers, and managing the future transport capacity.

§ The company was party to an Operating Agreement with the owner of the asset. The agreement provides that the owner charges the company for the use of the asset.

§ The company engaged third parties to carry out the operation and maintenance of the asset.

§ The company bore the cost of insurance relating to the operation and maintenance of the asset.

5. This description of the business from incorporation to 2004 is based on the following:

§ The company was appointed as operator of the asset

§ The company had an obligation to operate and maintain the in accordance with customer contracts

§ The company was party to the operating agreement with the asset owner from 199X which confers rights to use the asset

§ The company had various customer agreements stipulating the types of services the company provided, the pricing methodology and structure of such services, and

§ The company had labour and service agreements.

6. The company submitted an arrangement, outlining the services the company proposed to offer, for approval to a regulatory body and a proposed access arrangement for the asset to that entity for approval. The regulator assessed the proposed arrangement against relevant legislative requirements and principles of the relevant laws. A final decision was made in 2003 on the services to be offered. The company offered a series of services where the company transported the customer's products in various ways.

7. The company's business during the period beginning in 2004 and ending on 30 June 2008 was as follows:

§ The company operated and maintained the asset and management of core business

§ The company earned revenue from transporting customers products, construction for customer specific work, operating and maintaining customer specific work & minor interest income

§ The company entered into all commercial contracts with customers

§ The company engaged third parties to carry out the operation and maintenance of the asset

§ The company bore the cost of insurance of the operation and maintenance of the asset.

8. The description of the company's business during this time is based on the following:

§ The company's continued appointment as operator of the asset

§ The company's continued obligation to operate and maintain the asset in accordance with customer contracts

§ The continuing asset operating agreement between the company and the asset owner

§ The company's various customer agreements, determining the types of services the company provided, the pricing methodology and structure of such services, and the company's major customers

§ The company entered into insurance arrangements and

§ The company's labour services agreement.

9. Following the change in ownership in 2004, the company submitted revisions to the access agreement to the relevant regulatory body for approval. This document outlined the services the company intended to offer. The company offered a series of services where the company transported the company's customer's products in various ways that were more extensive than the company's previous agreement.

The company's customers

10. The company enter into transportation contracts with customers. These contracts require the customer to deliver their products to the company and collect them each day. These contracts recognise that this sometimes not all products are collected and include an allowance for uncollected products. This margin allows for a variance between the amount of product delivered and the amount collected on a given day by a customer. When the allowable variance is exceeded by a customer, that customer pays a fee, or faces contractual consequences, depending on the terms of the customer's contract.

11. The company provided services to more customers in the 2008 income year than it did in 199X; however the largest customers remained the same and continued to account for more than 85% of customer revenue. New customers all operated within the same industries and terms as the existing customers. The number of customers increased due to the assignment of contractual rights and obligations to new parties and growth in the company's core customer base.

12. The company have provided services from the earliest test time until 30 June 2008 on the same basis with respect pricing policies and access to the company's services by customers. A majority of the company's revenue is from reservation charges with the remainder derived from usage charges. This has remained constant until today and is expected to remain constant until 30 June 2014 income year.

13. From the period beginning immediately before the earliest test time until 30 June 2008 each of the services provided were based on the applicable standard customer contract in place with the relevant customers. A majority of the company's revenue was derived from providing these services in each of the income years during this period.

14. The contracts the company have entered into since the earliest test time require the company to provide the same services, however, in some instances the terms and conditions of services have changed. These changes provide additional flexibility to the customers in their usage of the company's services, particularly in relation to enabling them to deliver more of their products on a given day than they collect on that day.

15. One of the company's customer contracts entitles the customer that is party to the contract to keep a permanent excess of its product that it delivers to the company over what it has collected. This customer has always had this right consistently since 199X. The contracted capacity for this customer contract, and hence the revenues from this contract, represent one of the company's largest customers that have remained the same since 199X.

16. Since the company's incorporation, the total revenue generated from charges where products delivered by customers exceeded what they collected on a given day has been negligible in terms of total revenue in any given income year.

17. Certain data had always been provided at the relevant times to customers in accordance with provisions within their contracts. In the year ended 30 June 2008 additional data was provided to customers comply with legislative requirements.

18. Immediately before the test times until 30 June 2008 special projects/ chargeable services were undertaken. These include the construction of customer specific facilities. These facilities form part of the asset.

19. The company provide ongoing operation and maintenance of customer specific works, and facilities that are linked to the asset for other facility owners. For the period beginning 199X and ending 30 June 2008 the resources required to provide such services were sourced from a combination of services and equipment provided by the owner of asset under the asset operating agreement and from specialist contractors and consultants. The specialist contractors and consultants changed between the test times and 30 June 2008 however the nature of the services to which they were engaged did not.

Location

20. The location of the asset has not changed since 199X. There have been some minor changes to where the company carry out the company's support services.

Operation of the asset

21. All of the company's activities in relation to carrying on the company's business were carried out in the same manner from199X and will continue to be carried on in this manner until 30 June 2014.

22. The asset underwent several capacity increases since the company's incorporation.

The company

23. The company's trade names, trade marks and branding were unchanged from immediately before the earliest test time.

24. The company did not hold any patents. The company was not party to any royalty arrangements for the period immediately before the test times.

25. The asset is owned by an entity with an identical ownership structure to the company. The capacity of the asset has doubled since this expansion began in 2004. Prior to this expansion the company would have been able to undertake the proposed transaction, however, the terms of the transaction would have been on a smaller scale.

Staffing

26. The company have never employed any staff directly and have always outsourced the labour and services required to operate and maintain the asset to third parties.

27. The labour required to operate and maintain the asset increased during the period starting immediately before the earliest test time and the year ended 30 June 2008, however, the nature of the services performed did not change. The nature of the services performed is presently not expected to change until 30 June 2016.

28. The asset was operated and maintained in the same way as it was immediately before the earliest test time and will continue to be the case until 30 June 2016. The increase in labour and associated expenditure required has been driven by the increased capacity of the asset and due to an increase in the unit cost of labour.

Previous private ruling transaction

29. The company was previously issued a private ruling in relation to providing a service to an existing customer (prior private ruling transaction).

30. The prior private ruling transaction supported the customers existing transportation agreement by providing the customer with continuous service by the asset for an agreed period of time, and transport it to suit their requirements.

31. The customer approached the company to enter the agreement. The company did not approach the customer with the proposal.

32. The company and the customer had been parties to a transportation contract since the company's incorporation.

33. At the end of the calendar year the customer will be able to fully utilise the decision of the prior private ruling. The company is in charge of proper use of the asset by customers and maintenance of the asset.

34. The total revenue received from the proposed transaction would represent an insignificant amount of the total revenue the company will earn during the prior private ruling transaction period.

35. The prior private ruling transaction includes an option for the company to purchase, for an agreed price, any commodities remaining in the asset at the termination of the proposed transaction period. This clause is an extension of a contractual feature which has existed for the asset contracts since the incorporation of the company.

36. The prior private ruling transaction did not give rise to any change in the manner in which the company carry out day to day activities, nor did it impact on the way the asset is operated and maintained overall. The company ran the asset in exactly the same way, using the same people, techniques and processes that the company used prior to the prior private ruling transaction being entered into. The only impact the prior private ruling transaction may result in is a greater emphasis on the daily tracking of stored commodities in the asset, however, this can be accommodated by the data collection and management systems the company already had in place.

37. The company did not make new capital investment to enable it to provide the prior private ruling transaction.

38. The company did not utilise additional staff or alter the roles of existing staff to provide the prior private ruling transaction.

39. No existing contracts to which the company were a party were amended as part of or as a result of providing the prior private ruling transaction.

40. The prior private ruling transaction has no impact whatsoever on the company's ability to service existing customers, nor on its ability to accept customers requiring the same services as currently received by existing customers.

The Proposed Service

41. An opportunity has arisen for the company to provide a service (proposed transaction) to an existing customer (Customer A).

42. The proposed transaction will support Customer A's existing customer contract by providing Customer A with an assurance of supply of their products to their commercial operations.

43. Customer A approached the company to enter the agreement. The company did not approach Customer A with the proposal.

44. The primary difference between the Proposed Service and the Private Ruling Service is that the Proposed Service will be flexible with regards to the frequency at which Customer A can deposit or extract their product from the asset.

45. Specifically, the following facts should be noted regarding the Proposed Service applicable to Customer A, and outline how the Proposed Service will form part of the company's business activities:

§ To date, a number of customers have expressed to the company their interest in some form of the service. Allocation of storage volume to each customer is at the discretion of the company subject to its obligations under its transportation agreements, commercial terms and technical limits of the asset

§ The company anticipates more customers will express an interest in entering into discussions around the Proposed Service when there is increased awareness that such storage services are available from the company, however the company has only a limited amount of capacity available for the Proposed Service;

§ All interested customers, and potential customers who may use the proposed service, have their product transportation contracts on foot with the company. Generally customer agreements run for X years or more;

§ The Proposed Service allows a customer to commence delivering their product from the execution date throughout the contract term up to an agreed maximum daily rate. The amount of their product delivered would be set for the duration of the Proposed Service;

§ The withdrawal rate limits set by the customers existing transportation agreement with the company.

§ The Proposed Service would represent an negligible amount of total revenue;

§ The Proposed Service includes an option for the company to purchase, for an agreed price, any product remaining in the asset at the termination of the service period. This clause is an extension of a contractual feature which has existed in asset contracts since the incorporation of the company, under which imbalances could be 'cashed out' at the end of each month at the company's discretion.

§ The Proposed Service will not give rise to any change in the manner in which the company carries out its day to day activities, nor will it impact on the way the asset is operated and maintained overall. The asset will be run by the company in exactly the same way, by the same people, using the same techniques and processes as are employed currently. The only impact the Proposed Service may have would be a greater emphasis on the daily tracking of stored product in the asset which can be accommodated by the data collection and management systems already in place;

§ When the customer delivers its products to the company, title, risk and control of the products would pass to the company.

§ Only a minimal amount of additional operating expenditure will be required to provide the Proposed Service, and no new capital investment will be required to provide the Proposed Service;

§ The company will not have to add additional staff nor alter existing role descriptions to provide the Proposed Service;

§ The quality of the products within the asset will not be impacted by providing the Proposed Service;

§ No existing contracts will be materially amended as part of, or as a result of providing the Proposed Service;

§ The pricing structure to be used in the proposed service is an arm's length price.

46. Each customer has noted that their respective long term operational and contingency plans may be impacted by the ability of the company to offer the Proposed Service. The company needs to advise the interested customers whether or not it can provide the Proposed Service or the commercial opportunities for the company will lapse, as interested shippers are forced to enter into other arrangements in place of the Proposed Service.

47. Assuming the Proposed Service was provided by the company:

§ There would be no increase in the number of customers to which the company supplies transportation services as a direct result of providing this service;

§ There would be no change in the overall capacity of the asset;

§ There would no change in the working capital or capital of the company;

§ There would be no change in the location of the company's operations; and

§ There would be no change in the number of employees employed by the company or their job descriptions, the directors or the management of the company.

48. There is no reason that the company could not have offered the Proposed Service since its incorporation.

Statements regarding application of relevant tax legislation

49. The company has not, and will not, enter into any business activities other than those identified in this ruling as part of the Proposed Service offering. That is, this ruling is limited to the business activities described in the scheme including the proposed transaction.

50. The company have stated that apart from the proposed transaction that is described in this ruling, the company's business will be the same for the purposes of subsection 165-210(1) of the ITAA 1997 as the business described in these facts for the period from immediately before the earliest test time to 30 June 2008.

Assumptions

The business carried on by the company during the whole of the year ended 30 June 2008 continued to be carried on until at least year ended 30 June 2016.

The company would meet the requirements of sections165-210(1), 165-210(3) and 65-210(4) following implementation of the scheme outlined in the facts of this ruling.

Relevant legislative provisions

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 Paragraph 165-210(2)(a)

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

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Subsection 165-210(1) states that 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.

However, subsection 165-210(2) states that a company does not satisfy the same business test if at any time during the same business test period the company derives assessable income:

(a) from a business of a kind that it did not carry on before the test time (paragraph 165-210(2)(a)). This is generally referred to as the 'new business test'; or

(b) from a transaction of a kind that it had not entered into in the course of its business operations before the test time (paragraph 165-210(2)(b)). This is generally referred to as the 'new transactions test'.

Section 165-13 provides the meaning of 'the same business test period' and 'test time' when determining whether or not an entity satisfies the requirements of subsection 165-210(2). Subsection 165-13(2) states that the 'same business test period' for a company is the income year in which the company wishes to deduct tax losses of earlier income years. The 'test time' is determined by the table provided by subsection 165-13(2) as shown below:

The Commissioner's views concerning the application of the 'same business test' are set out in Taxation Ruling TR 1999/9.

The company does not satisfy item 1 of the table provided by subsection 165-13(2) at any time during the following loss years:

§ 1 January 2001 to 31 December 2001;

§ 1 January 2002 to 31 December 2002; and

§ 1 January 2003 to 31 December 2003.

Given that the company was in being throughout each of the above loss years, item 2 of subsection 165-13(2) applies to determine that the company will have a test time in relation to its losses of 1 January in each of those loss years.

The company satisfied item 1 of subsection 165-13(2) in relation to the period from 1 January 2004 to 30 June 2005. Given that the company failed COT in the calendar year ended 2004, this represents the latest time that the company is able to practicably show that it satisfied item 1. Therefore, the test time for the income year ending on 30 June 2005 is 27 October 2004.

In summary, your test times for the relevant loss years are shown in the table below:

The company have stated that they will make a taxable profit (that is, total assessable income will exceed total allowable deductions) for the years covered by this private ruling (not including any allowable deductions for tax losses incurred in prior years). Therefore, the same business test period under subsection 165-13(2) in relation to the proposed transaction will be the income years ended 30 June 2012 to 30 June 2015, inclusive.

New business test

Paragraph 165-210(2)(a) states that a company does not satisfy the same business test if at any time during the same business test period, the company derives assessable income from a business of a kind that it did not carry on before the test time. This is generally referred to as the 'new transactions test'.

The meaning of 'before the test time' is considered in paragraph 88 of Taxation Ruling TR 1999/9. It is recognised that in applying the new business test it is relevant to examine the period immediately before the test time. However, it is also recognised that not all business undertakings will be evident immediately before the test time. Therefore, for the purposes of the new business test, it is only necessary that the new business undertaking be part of the overall business of the taxpayer immediately before the test time, not necessarily that the specific undertaking be conducted immediately before the test time. This recognises that some business that is carried on may be intermittent or dormant immediately before the test time, but still form part of the overall business of the taxpayer at that time.

Paragraph 14 of TR 1999/9 provides that the new business test considers whether the company derived assessable income from a kind of enterprise, or undertaking of a kind, that it had not engaged in before the test time. Where income is derived during the same business test period from an enterprise or undertaking of a kind that had not been engaged in just before the test time, the new business test is failed. Paragraph 16 states that the content of the word 'kind' in the context of the new business test is to be derived from the course of the company's business operations before the test time. Further, 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 operations, 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.

Paragraphs 63 to 77 of TR 1999/9 provide an explanation to the interpretation of the 'new business test'. Paragraph 66 of TR 1999/9 stresses that the legislative intention underlying the new business test is to prevent the injection of income into a loss company while permitting, within limits consistent with the prevention of tax avoidance, the development and expansion of the overall business carried on immediately before the change-over. Such an injection of income might occur by means of activities that form part of the business and would not cause the business to cease to be the same; this might occur, for example, through a new undertaking or enterprise that had not been carried on before the change-over, or through entering into a transaction, in the course of the business operations of the business, which was not one that would have been expected to be entered into in the natural flow of the taxpayer's business prior to the change.

Paragraph 67 of TR 1999/9 states that the new business test allows a business to expand and develop, provided the activities by which it produces its income remain of the same kind. The limits to expansion and development provided by these tests express the balance decided by Parliament between the prevention of tax avoidance and the facilitation of takeovers and mergers carried out for sound commercial reasons and that are unassociated with tax avoidance.

The new business test looks at each particular undertaking or enterprise carried on or out by the company during the same business test period and compares them to the undertaking or enterprises that formed the taxpayers business immediately before the test time. Paragraph 69 of TR 1999/9 states that where activities of a different kind are carried on after the test time with some degree of system, repetition and continuity and are distinguishable from the other activities of the company before the test time, it is likely a new undertaking has been commenced that is different in kind to those carried on before the test time. Where such activities are carried on the new business test is failed.

Paragraph 71 states that where a company commences a new undertaking and amalgamates it in its overall business the Commissioner must determine whether the amalgamated undertaking was of the same kind as the undertakings of the business carried on by the taxpayer immediately before the test time. Here, the new business test considers whether even though the same business is taken to be carried on after the amalgamation of the new business, that same business includes activities of a kind not carried on before the test time.

Paragraph 72 states that generally, the new business test permits a company to expand or develop during the same business test period within the same fields of endeavour as it was engaged in prior to the test time, provided the effect of any expansion or development does not cause the company to fail the same business test. Cases where failure occurs tend to be where income is being injected or could be injected as a result of the new business.

Paragraph 74 of TR 1999/9 states that a new undertaking or enterprise may be of a different kind from an old one, even though some or all of the transactions that it comprises or by which it is carried on, occurred in the old undertaking or enterprise because, in a different context, those transactions, considered with the other business operations of the taxpayer, may be such as to lend a different character to the undertaking or enterprise considered as whole.

Prior to the test times the company's business involved the operation and maintenance of the asset. This entailed determining whether customers would be granted access to deposit products into the asset and withdraw it at a later time, as required by their needs. At different times since the company began operating the asset in the late 1990's, this has required the company to allow customers to leave their products in the asset for various reasons such as a short term imbalance between what the customer's deposited and withdrew during a set time frame. This was extended in early 2000's to allow customers to deposit products and withdraw it up to a month later as part of a service the company provided. The company have also had in place a contractual requirement for one of the company's customers to maintain a positive imbalance of their product in the asset of up to 50% of that customers contracted capacity since the late 1990's. Whilst the company have stated that the revenue they have received from these activities has never represented a substantial amount of the company's total revenue in an income year, it could be said that they have derived income by allowing customers to maintain a positive imbalance in the asset since the late 1990's.

The company are considering entering the proposed transaction described in the 'relevant facts' of the Private Ruling. This transaction will enable several of its current customers to utilise the asset to deposit more of their products than it withdraws during a specified time period into the asset, and also withdraw more products than it deposits during a specified time period, until 30 June 2015. There is a limit to the amount of a customer's product that can be deposited without being withdrawn during that time period. The company will receive revenue for granting the capacity to each customer to maintain an over supply of the product in the asset. Allowing each customer to do this under a one off contract would cause a negligible change to the way in which the company's business is operated and negligible increase in their expenses.

As demonstrated above, the company have always derived income from allowing customers to maintain an over supply in the asset since the time the company began operating it. As outlined in paragraph 14 of TR 1999/9 the new business test is concerned with whether the new undertaking that derives income is of a kind that was not a part of the business of a company prior to the test time. Based on the above comparison it would appear reasonable that deriving income by allowing a customer to maintain an over supply in the asset does not represent a new business relative to the kind of business the company carried on immediately before the test times. The proposed service is merely an extension of the terms previously made available to the company customers.

TR 1999/9 also prescribes that where activities of a different kind are carried on after the test time with some degree of system, repetition and continuity and are distinguishable from the other activities of the company before the test time, it is likely a new undertaking has been commenced that is different in kind to those carried on before the test time.

The activities to be undertaken by the company to provide the proposed service have little to no impact on the operation of their business as it was operated just before the test times. Rather, the provision of the proposed service represents a natural extension of the business of the company just before the test time. The proposed service represents a method of deriving income which could have been entered into before the change-over in the course of their business operations given the existing capacity of the asset beyond that required to provide its customers in the same business test period with the identical services that were provided just before the test times.

It is considered neither extraordinary nor unnatural in the context of the company's business that it carried on just before the test times that they would utilise excess capacity of its infrastructure to respond to demand of the customers that it was servicing as part of its business previously. As such, it is considered that the proposed transaction represents a mere extension of the business carried on by the company just before the test times. Had the demand from customers at that time been in existence for the proposed service and the company had excess capacity available, it could have provided the proposed service as a natural part of its business before the test times without altering the way in which its business was operated at that time. As such, it is not considered that adding the proposed service to its business would represent a business activity that was distinguishable from the business activity of the company just before the test times.

In scenario 2 of example 7 of TR 1999/9 a company mined and sold gold prior to the test time. As part of its operations before the test time the company also stockpiled copper concentrate, a by product of its gold mining for which it already had the necessary plant. When the company begins to sell the copper concentrate it does not fail the new business test as the business of selling minerals (including copper concentrate) commenced with the mining and concentration of those minerals. However, it is noted that had the company decided to sell pure copper it would have failed the new business test as this would have required the installation of new plant.

This scenario is similar to the circumstances of the company. To enable the company to undertake the proposed transaction, the impact on the company's expenses and current operations is relatively negligible, requiring no changes or expenditure on plant, minimal increase in expenses, and only a minor increase in the company's data monitoring and provision to the customer. The fact that undertaking the proposed transaction has such a minimal impact on the company's business supports the fact that the new business test is satisfied, as it was in the above scenario of example 7.

Conclusion

Undertaking the proposed service will not cause the company to fail the same business test due to the application of the new business test under paragraph 165-210(2)(a). It is not considered that the proposed service represents a business of a kind that the company did not carry on before the test time.

New transactions test

Paragraph 165-210(2)(b) states that a company does not satisfy the same business test if at any time during the same business test period, the company derives 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. This is generally referred to as the 'new transactions test'.

The meaning of 'before the test time' is considered in paragraph 88 of TR 1999/9. It is recognised that in applying the new transactions test it is relevant to examine the period immediately before the test time. However, it is also recognised that not all transactions will be evident immediately before the test time, therefore, for the purposes of the new transactions test it is only necessary that the new transaction be part of the overall business of the taxpayer immediately before the test time, not necessarily that like transactions be conducted at that time, as it is recognised that some transactions entered into may be intermittent or dormant immediately before the test time, but still form part of the overall business of the taxpayer at that time.

Paragraph 15 of TR 1999/9 states that the new transactions test is directed at 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 only 'isolated' or 'independent' transactions. Generally, the new transactions test is not failed by transactions of a type that are usually unmotivated by tax avoidance, that is, transactions that could have been entered into ordinarily and naturally in the course of business operations carried on by the taxpayer before the test time.

Paragraph 16 of TR 1999/9 states that the content of the word 'kind' in the context of the new transactions test is to be derived from the course of the company's business operations before the test time. A transaction from which income is derived during the same business test period, which could have been entered into before the test time in the course of the company's business operations, and which is neither extraordinary nor unnatural in the context of the business carried on by the company at the test time, is generally a transaction of the same kind as transactions actually entered into by the company before the test time.

The company offered additional capacity to a customer to maintain a positive imbalance in the asset from the late 1990's, before the earliest test time. The company have continuously provided this service to the customer right through the test times and continue to do so. The company have also allowed other customers to maintain an over supply since the company began operating the asset. The company do not determine the capacity of the asset. This is controlled by various external influences. In 2004 the company was required to increase the capacity of the asset. As a result, the company have additional capacity in the asset that is available for excess products that was not available prior to the increased capacity. In light of the above facts, it is not considered unnatural or extraordinary in the context of the business that the company carried on that they would make excess capacity in the asset available to its current customers to store products to derive income, particularly given that the company have stated that doing so will have no effect whatsoever on their ability to service existing customers needs and contracts that are in place.

Paragraph 17 of TR 1999/9 states that for the purposes the new transactions test, 'transaction' refers to any operation or dealing from which income directly or indirectly flows or arises, and a company enters into a transaction for the purposes of the new transactions test if it engages or participates in that operation or dealing. The new transactions test is intended to extend to every means by which a company may derive income, including transactions of a passive or investment character. The words 'business operations' refer to everything that a company undertakes or does. Together, the business operations constitute the business, meaning the overall business, of the company.

The company propose to enter contracts that allow several of its existing customers to store more products into the asset during a specified time than they are able to withdraw under their current customer contract. This will enable the customers to build up an excess of products in the asset, creating an excess of that customers product in the asset. The customers will withdraw more product than they deposit during a specified time period until the end of the contract period. This will result in the customers reducing the over supply of their products they have deposited into the asset from the date of execution of the contract to the customer's normal level by the date upon which their contract ends. The company will derive revenue as a result of entering the contract by charging a fee for making storage capacity within the asset available to the customer, and when the shipper utilises the capacity.

In accordance with paragraph 17 of TR 1999/9 entering into the contract would represent entering a transaction for the purposes of paragraph 165-210(2)(b) as the company would be deriving income as a result of entering and fulfilling each contract.

Scenario 1 of Example 11 in TR 1999/9 considers a situation where a company grows clover for sale on land it owns for sale as fodder. From time to time the company buys virgin land from the Crown, clears it and sows clover (usually a term of the sale is that the land be cleared and a crop sown within 12 months of purchase). The company suffers losses in one year due to a drought. The company is purchased by a new entity (this is the test time). The company buys more virgin land but sows, harvests and sells a crop of wheat due to a shortage of clover seed. Thereafter, the company sells only clover. Although the company has never sown and sold wheat before it passes the new transaction test as the transaction is one that could have been entered into in the course of business operations before the test time and is not extraordinary by reference to the ordinary course of the company's business operations.

The company circumstances are considered to be similar to those in scenario 1 of example 11 in TR 1999/9. It is considered that the company could have made the excess capacity of the asset available to customers prior to the test time. This would not have been considered extraordinary in reference to the ordinary course of their business operations before the test times. Therefore, like the company in the example discussed above, it is considered that the company do satisfy the new transactions test in relation to the proposed transaction regardless of the fact that the terms of the contract are different to those that the company have entered into prior to the test times.

Conclusion

Undertaking the proposed service will not cause the company to fail the same business test due to the application of the new transaction test under paragraph 165-210(2)(b). It is not considered that the proposed transaction represents a transaction of a kind that the company had not entered into in the course of their business operations before the test times. This is predominately due to the company being able to enter into the transaction, even if on a different scale, before each of the relevant test times.