Edited version of private advice

Authorisation Number: 1052015691597

Date of advice: 1 August 2022

Ruling

Subject: Modified similar business continuity test

Question

Can tax losses incurred by Company A Ltd for the financial year ended 30 June 20XX be transferred to Company A Ltd as the head company of the Company A Ltd income tax consolidated group when it is formed in a later income tax year?

Answer

Yes

Relevant facts and circumstances

Company A Ltd

1.      Company A Ltd is an Australian resident company. It listed on the Australian Securities Exchange (ASX) in an income year prior to the year that the loss was incurred.

2.      Company A Ltd meets the definition of a widely held company and so is able to access concessional rules for tracing ownership of its shares.

3.      Company A Ltd only has one class of share on issue and all shares have equal voting, dividend, and capital rights.

4.      Company A Ltd made an election to become the head entity of a tax consolidated group (Company A Ltd TCG) with its wholly owned subsidiary, Company B Pty Ltd in an income year after the income year in which the loss was incurred.

5.      Company A Ltd has tax losses for the year ending 30 June 20XX, before joining the Company A Ltd TCG.

6.      All of Company A Ltd's business activities were, and continue to be, conducted within Australia.

7.      Company A Ltd has funded its business and development exclusively through capital raisings and does not hold any debt.

Major activities

Overview of main business activity

8.      The major asset that Company A Ltd use to generate its income is its website-based platform. Company A Ltd has focussed on developing its platform over the years by improving the automation and mechanisms behind its platform. This has included adopting cloud technology and the development of integrated offerings to help increase revenue.

Acquisition of Company A Overseas Ltd and Company C Overseas Ltd

9.      Company A Ltd acquired the shares in Company A Overseas Ltd in the 20XX income year.

10.   In 20XX, Company A Overseas Ltd then entered into a purchase agreement to acquire the business of Company C Overseas Ltd. This acquisition was completed just after the 20XX year. Company A Ltd and Company A Overseas Ltd offer the same suite of products in Australia and overseas.

11.   The acquisition of Company C Overseas Ltd was an expansion of the business to a new market (with new clients - i.e., there were no shared clients between Company A Ltd and Company A Overseas Ltd prior to the acquisition) with the same processes and technology being used by Company A Ltd and Company A Overseas Ltd. Since this time there has been a clear demarcation between the Australian business and the overseas business and their respective customers. The acquisition was made to ultimately establish the Company A Ltd brand and technology overseas.

12.   The following assessable income was generated directly from Company A Overseas Ltd in the 20XX financial year and the 12 months prior to date of formation of the Company A Ltd TCG.

•                     management fees; in relation to administration and support services to Company A Overseas Ltd - the management fee income was generated, in part, using the existing assets of Company A Ltd that were already owned by Company A Ltd prior to their acquisition of Company A Overseas Ltd and utilised in Company A Ltd's management and back-office processes. The existing assets were simply generic assets used in the normal functioning of Company A Ltd's office rather than core assets used to drive the sales of Company A Overseas Ltd (e.g., intangible assets and goodwill). The management fee represents a very small amount of the sales revenue generated by Company A Ltd in the 12 months prior to the date of formation of the Company A Ltd TCG; and

•                     interest on a working capital loan to Company A Overseas Ltd; the interest income is generated through an intercompany working loan between Company A Ltd and Company A Overseas Ltd - Company A Ltd has provided a working capital loan to Company A Overseas Ltd. Company A Ltd charges interest on this loan in line with its transfer pricing policy. The loan was first put in place prior to the end of the 20XX income year. Interest on the loan was not charged during the 20XX income year. This income generated is negligible compared to the overall sales revenue generated by Company A Ltd.

13.   Company A Overseas Ltd provides materially the same product offerings as Company A Ltd and has adopted the Company A branding (e.g., same business name, logo) and website-based platform.

14.   The majority of Company A Ltd's revenue has been generated from activity A.

15.   There has been a significant increase in the customer numbers between the 20XX financial year and the 12 months prior to the date of formation of the Company A Ltd TCG.

16.   While the customer base has increased substantially, the proportion of business to individual customers has remained consistent. In addition to the customer mix remaining steady, Company A Ltd retained a very large portion of its business customers throughout the 20XX financial year and throughout the 12 months prior to the date of formation of the Company A Ltd TCG.

Summary of revenue

17.   Company A Ltd's sales revenue has been generated primarily through its website platform from the start of the financial year ended 30 June 20XX and the 12 months prior to the date of formation of the Company A Ltd TCG.

18.   Company A Ltd's assessable income for the financial year ended 30 June 20XX consisted exclusively of sales income (with only a small amount of accounting income attributed to interest and other income listed in the Annual Return being negligible).

19.   The company's assessable income in the 12 months prior to the date of formation of the Company A Ltd TCG included the following additional, negligible income compared to its majority activity A sales income:

•                     management fees

•                     JobKeeper payments - and

•                     interest income (with again, only a negligible amount attributed to this category)

Products

20.   The same product offerings have remained available and sold to customers in the financial year ended 30 June 20XX and the 12 months prior to the date of formation of the Company A Ltd TCG. No offerings have been added or discontinued in that time. Whilst there have been some changes in the way that products are offered (i.e., through improvements in automation via the company's website), there has not been a wholesale evolution in these income generating activities.

Staff

21.   For the financial year ended 30 June 20XX and in the 12 months prior to the date of formation of the Company A Ltd TCG:

•                     The majority of senior staff and executives have been retained.

•                     There were was a significant change in the number of Directors in the 20XX income year compared to the 12 months prior to the date of formation of the Company A Ltd TCG

•                     Company A Ltd has maintained the same CEO, General Counsel, IT Manager and Head of Marketing throughout the 20XX to the 12 months prior to the date of formation of the Company A Ltd TCG with other executives remaining with the business in various roles.

22.   There has been a reduction in overall staff numbers from 30 June 20XX to the 12 months prior to the date of formation of the Company A Ltd TCG, despite an increase in the volume of clients. This has been due in large part to improvements in the company's technology and automation, which has reduced manual processing by staff.

Technology

23.   A notable change to Company A Ltd's business has been its focus on utilising new technology to streamline and improve its business. Company A Ltd's major focus has been on workflow automation through its website. This has enabled the processing of a larger number of transactions with roughly the same number of staff.

24.   There has also been a push towards integration of Company A Ltd software on the backend of customer websites to create a smoother experience. Integrated sales still contribute now to a minimal amount of sales revenue, however, these are predominantly sales that would have otherwise been made through the Company A Ltd website. Cloud based storage and security has been adopted during the 20XX financial year and in the 12 months prior to the date of formation of the Company A Ltd TCG to ensure that Company A Ltd has been utilising the most efficient and secure technology available.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 165

Income Tax Assessment Act 1997 section 165-11

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 Division 166

Income Tax Assessment Act 1997 Subdivision 166-A

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 Subdivision 707-A

Income Tax Assessment Act 1997 section 707-120

Income Tax Assessment Act 1997 section 707-125

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Section 701-1 states that if an entity is a subsidiary member of a consolidated group for any period, it is taken to be a part of the head company of the group, rather than a separate entity during that period.

Under Subdivision 707-A, a loss made by an entity before the time it becomes a member of a consolidated group is transferred to the head company of the group at the joining time if the entity could have utilised the loss had the entity not become a member of the group. The Subdivision applies to losses incurred after 30 June 1999 and is applied to each loss that the joining entity seeks to transfer separately, and not the total amount of all the losses carried forward at the joining time.

Section 707-120 effectively provides that an unused carried forward loss of a joining entity can be transferred to the head company of the joined group to the extent that the joining entity could have utilised the loss for an income year referred to as the 'trial year' (assuming that the joining entity had sufficient income or gains for the trial year against which to apply the loss and the joining entity had not become a member of the joined group).

Transfer of loss from joining entity to head company

Section 707-120 contains the test for transfer of losses from a joining entity to the head company of a tax consolidated group. Section 707-120 provides:

(1) Subject to subsection (1A), the loss is transferred at the joining time from the joining entity to the head company of the joined group (even if they are the same entity). (emphasis added)

Section 707-120 makes it clear that subsection 707-120(1) applies equally to companies joining a tax consolidated group in the capacity of a head entity, such as in this case with Company A Ltd joining the Company A Ltd tax consolidated group as head entity.

When determining if the joining entity could have used the tax loss in the 'trial year' (defined below), the assumptions in paragraphs 707-120(1A)(a), 707-120(1A)(b) and subsections 707-120(3), and 707-120(4) apply:

(1A) The loss is transferred under subsection (1) only to the extent (if any) that the loss could have been utilised by the joining entity for an income year consisting of the trial year if:

(a) at the joining time, the joining entity had not become a member of the joined group (but had been a wholly-owned subsidiary of the head company if the joining entity is not the head company); and

(b) the amount of the loss that could be utilised for the trial year were not limited by the joining entity's income or gains for the trial year.

Business continuity test involving trial year

(3) When working out whether the joining entity carried on, throughout the *trial year (or a period including the trial year):

(a) the same business as the business it carried on at a particular time; or

(b) a similar business to the business it carried on at that 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.

Transfer of loss for income year overlapping trial year

(4) If the loss was made by the joining entity for an income year all or part of which occurs in the * trial year, the transfer of the loss under subsection (1) is not prevented by the fact that the loss was made for that income year. (emphasis added)

Broadly, this means that the tax loss must satisfy the general loss recoupment rules before it can be transferred to the head company of the joined group at the joining time.

The trial year:

Subsection 707-120(2) sets out the meaning of the trial year:

What is the trial year?

(2) The trial year is the period:

(a) starting at the latest of these times:

(i) the time 12 months before the joining time;

(ii) the time the joining entity came into existence;

(iii) 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 a consolidated group just before the joining time;

(b) ending just after the joining time.

In Company A Ltd's circumstances, the trial year will be the period that starts 12 months before the joining time and ending just after the joining time. (NB: due to the assumption in subsection 707-120(2) - discussed further below - any change in Company A Ltd's business activities at and just after the joining time date is effectively not relevant for transfer testing)

General loss recoupment rules

The general loss recoupment rules that need to be considered when determining whether the joining entity could have utilised a loss (had it not become a member of a consolidated group) are set out under Division 165.

Section 165-10 provides that a company cannot deduct a tax loss unless it can satisfy:

•                     the continuity of ownership test under section 165-12 or

•                     alternatively, pursuant to section 165-13, the business continuity test (being either the same business test at section 165-210, or alternatively, the similar business test at section 165-211 of the ITAA 1997).

These tests are modified, under Subdivision 166-A, for widely held companies or eligible Division 166 companies.

Division 166 provides certain concessions when applying the rules in Division 165 to a widely held company or an eligible Division 166 company. Broadly, subsection 995-1(1) provides that:

•                     a widely held company means a company whose shares (except shares that carry a right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange, and

•                     an eligible Division 166 of the ITAA 1997 company means a company where more than 50% of the voting power, rights to dividends or rights to capital distributions are held by certain entities, including a widely held entity.

Company A Ltd listed on the ASX in an income year prior to 20XX.

Continuity of ownership test

Broadly, a company fails the continuity of ownership test (COT) if it undergoes a substantial change in its ownership or control during the period starting at the beginning of the loss year and ending at the end of the year when the company wants to use the loss.

For the purposes of the transfer test in section 707-120, as the trial year ends immediately after the joining time (paragraph 707-120(2)(b)), the COT is satisfied if the same majority ownership of the joining entity was maintained from the start of the income year in which the loss was made until just after the joining time.

Company A Ltd failed the COT during the trial year. Therefore, as a result, under non-modified conditions, Company A Ltd must satisfy the business continuity test in section 165-13 (addressed immediately below) in order to be able to transfer the tax losses to the head company.

Business continuity test (BCT)

Where a loss company fails the COT in section 165-12, section 165-13 provides that the company can still recoup its tax losses if the BCT in Subdivision 165-E is satisfied.

Subsection 165-13(1) states that:

(1) This section sets out the condition that a company must meet to be able to deduct the *tax loss if:

(a) the company fails to meet a condition in subsection 165-12(2), (3) or (4); or

(b) it is not practicable to show that the company meets the conditions in those subsections.

Note: Other provisions may treat the company as meeting, or failing to meet, the conditions in subsections 165-12(2), (3) and (4).

As Company A Ltd fails COT as it fails to meet any of the conditions in subsections 165-12(2), (3) or (4), it must satisfy the BCT conditions in section 165-13 in order to be able to deduct the tax loss.

Business continuity test period

The business continuity test period (BCT period) is a defined term under section 995-1, which states that the BCT period has the meaning given by a number of sections.

For the purpose of general loss recoupment rules, the BCT period and test time is determined by the table provided in subsection 165-13(2) (and this test time is also relevant in determining whether subparagraph 707-125(2)(a)(ii) is satisfied - see below):

(2) The company must satisfy the *business continuity test for the income year (the business continuity test period). Apply the test to the *business the company carried on immediately before the time (the test time) shown in the relevant item of the table.

Item 2 of the table at subsection 165-13(2) provides that if it is not practicable for the company to show that it has maintained the same owners for any period since the start of the loss year, the default test time is the start of the loss year.

The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 5) 2003 provides some guidance about what 'practicable' means for the purpose of section 165-13 of the ITAA 1997:

When is it not practicable for a company to show that it fails the COT?

4.17 Impracticability may arise where the necessary information on the beneficial ownership of shares does not exist or where the information cannot reasonably be obtained.

4.18 Also, a company may be able to identify the beneficial owners of its shares such that it may know that it has not satisfied the COT as between, say, the beginning of the loss year and the end of the income year. However, it may be impracticable to point to the time it actually failed the test.

In Company A Ltd's circumstance, it is listed on the ASX. As such Company A Ltd meets the definition of a widely held company and so can access concessional rules for tracing ownership of its shares.

As Company A Ltd cannot show that it has maintained the same ultimate owners for any period since the start of the loss year 20XX, it is not practicable for Company A Ltd to demonstrate that there is a period for which it has maintained the same owners. Company A Ltd therefore has access to the BCT under item 2 in the table at subsection 165-13(2). The BCT test period is therefore the start of the 20XX loss year as per item 2 of the table in subsection 165-13(2).

Modified business continuity test period for tax consolidated groups

The relevant section in relation to loss transfer on consolidation is section 707-125 which, at subsection 707-125(2) modifies the application of section 165-13 detailed above.

Subsection 707-125(2) states:

(2) Work out whether the loss is transferred on the basis that section 165-13 required the joining entity to satisfy the business continuity test for:

(a) the period (the business continuity test period) consisting of:

(i) the trial year; and

(ii) the income year that included the test time worked out for section 165-13 for the joining entity (disregarding paragraph (b) of this subsection), if that income year started before the trial year; and

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

Where the loss is transferred from the joining entity to the head entity, the assumption at subsection 707-120(3) also applies. Effectively, subsection 707-120(3) means that any change in Company A Ltd's business activities at and just after the joining time date is not relevant for transfer testing. As a result, it is the business activities just before the joining time date (up until 11.59 pm on the day before the joining time date) that are ultimately relevant for transfer testing purposes.

Accordingly, for the purpose of working out whether the loss can be transferred to Company A Ltd under the business continuity test, the following will apply to Company A Ltd:

Similar business test

Section 165-13 has the effect that a company may still use its tax losses despite failing the COT provided it satisfies the similar business test of the BCT.

The similar business test is set out in section 165-211:

165-211(1)

A company also satisfies the business continuity test in relation to:

(a) a *tax loss for an income year starting on or after 1 July 20XX; or

(b) taxable income for an income year starting on or after 1 July 20XX; or

(c) a *net capital loss for an income year starting on or after 1 July 20XX; or

(d) a debt, incurred in an income year starting on or after 1 July 20XX, that the company writes off as bad;

if throughout the *business continuity test period it carries on a business (its current business) that is similar to the *business it carried on immediately before the *test time (its former business). (emphasis added)

165-211(2)

Without limiting the matters that may be taken into account in ascertaining whether the company' s current business is similar to its former business, the following must be taken into account:

(a) the extent to which the assets (including goodwill) that are used in its current business to generate assessable income throughout the *business continuity test period were also used in its former business to generate assessable income;

(b) the extent to which the activities and operations from which its current business generated assessable income throughout the business continuity test period were also the activities and operations from which its former business generated assessable income;

(c) the identity of its current business and the identity of its former business;

(d) the extent to which any changes to its former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business.

165-211(3)

However, the company does not satisfy the *business continuity test under this section 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 *business continuity test period a business that is similar to the business it carried on immediately before the test time.

Law Companion Ruling LCR 2019/1 The business continuity test - carrying on a similar business (LCR 2019/1) explains the Commissioner's view on the application of the similar business test.

Paragraphs 6 to 14 of LCR 2019/1 immediately below conveniently and concisely explain how the similar business test operates:

The similar business test

6. The similar business test operates in a way that is comparable to the same business test, but removes the negative limbs which apply as part of that test. These negative limbs deny access to losses where activities or transactions are new and of a different kind to those entered into or carried on before a change in ownership or control. Removal of the negative limbs will allow companies and listed widely held trusts to engage in new business activities and transactions that evolve from their pre-existing business, without losing access to their unutilised losses, encouraging innovation.

7. It is still the case, however, that the overall business must satisfy the similar business test. The meaning of 'similar' depends on the context in which the term arises. In the context of the similar business test, 'similar' does not mean similar 'kind' or 'type' of business. The focus remains on the identity of a business, as well as continuity of business activities and use of assets to generate assessable income. Accordingly, it will be more difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time. In contrast, where a company develops a new product or function from the business activities already carried on, and this development opens up a new business opportunity or allows the company to fill an existing gap in the market, the business as a whole is likely to satisfy the similar business test.

8. For the purpose of determining whether a business remains sufficiently similar, the four factors that must be taken into account require a comparison between the essential characteristics of the business before and after the relevant change in ownership or control. These four factors do not limit consideration of any other matter that may be relevant to this determination. The weight to be given to each factor will depend on the facts and circumstances of each case.

9. The first factor considers the extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time. Where the same assets of the business are being used as at the test time to generate assessable income, albeit that they may be producing a different result or effect due to the development or commercialisation of some of those assets, this factor would indicate that the business remains similar to that previously carried on.

10. The continuing use of certain business assets to generate assessable income rather than other assets may be more relevant to the question of whether the similar business test is passed. For example, goodwill, which is the combined result of using the business' tangible, intangible and human assets in such a way that attracts custom to the business, will be more relevant than other assets, such as generic office premises, equipment and stationery, because it is closely linked to the identity of a particular business. If the goodwill that was used throughout the business continuity test period is replaced by new goodwill, it will be necessary to consider the extent to which other assets of the business have continued to be used and the amount of weight that should be given to that in comparison to other factors.

11. The second factor compares the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously. Where the business operator maintains the income generating activities and operations that were previously being undertaken, despite doing them in a different or more efficient way due to business improvements, this factor would indicate that the business remains similar to that previously carried on.

12. The third factor compares the current identity of the business with that of the business carried on before the test time. Where new activities have not resulted in the identity of the business changing, this factor would indicate that the business remains relevantly similar to that previously carried on.

13. The fourth factor requires an assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business. As the similar business test is designed to encourage businesses to innovate, such changes will not, in themselves, cause a business to be considered dissimilar. Where changes to the business do not result from such development or commercialisation, the business is less likely to satisfy the similar business test.

14. The first three factors are concerned with the aspects of the business that have continued, while the fourth factor assesses the nature of any changes that have happened. Where those changes are due to an evolution or development of the business, the business is more likely to be similar to that previously carried on.

Accordingly, for the purposes of working out whether the loss incurred in the 20XX income year can be transferred to the Company A Ltd TCG pursuant to subsection 707-12(2), section 165-13 is treated as requiring the joining entity to apply the similar business test i.e. the four factors in section 165-211 for

•                     the current business: the BCT period under paragraph 707-125(2)(a) as defined above, being:

o        the trial year) and

o        the income year that included the test time worked out for section 165-13 (i.e., the whole 20XX income year

•                     the former busines: that is, the test time, being 30 June 20XX.

First factor: the extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time

Company A Ltd's core income generating assets

The major asset that Company A Ltd use to generate its assessable income is its website based platform. The web domain was acquired in the 20XX income year. There has been constant development of this platform since this time to improve its automation and mechanisms behind its web-based operations. This has included adopting cloud technology and the development of integrated offerings to help increase revenue. The Commissioner accepts that use of the same assets to produce a different result or effect due to development or commercialisation of those assets does not mean that there has necessarily been a change in the business and reflects a natural progression to making existing functions more efficient.

As is evident from the facts, the vast amount of assessable income at the test time and during the 20XX loss year related to the sale of activity A from the website. During the trial year the majority of income was also generated via the website, however there was some additional, relatively smaller revenue from activities relating to Company A Ltd's overseas subsidiary i.e., minor management fees and interest income.

Assets used in generating income from Company A Overseas Ltd

Company A Ltd acquired Company A Overseas Ltd in the 20XX income year, which then acquired the business from Company C Overseas Ltd (full settlement of this transaction occurred) at the start of the next income year. The acquisition was to establish the Company A Ltd brand and technology overseas. The following assessable income was generated directly from Company A Overseas Ltd in the BCT Period:

•                     management fees in relation to administration and support services to Company A Overseas Ltd; and

•                     interest on a working capital loan to Company A Overseas Ltd.

The management fee income was generated, in part, using the existing assets of Company A Ltd that were already owned by Company A Ltd prior to their acquisition of Company A Overseas Ltd and utilised in Company A Ltd's management and back-office processes. These assets were simply generic assets used in the normal functioning of Company A Ltd's office rather than core assets used to drive the sales of Company A Overseas Ltd. (e.g., intangible assets and goodwill)

Interest income is generated through an intercompany working loan between Company A Ltd and Company A Overseas Ltd. The loan was first put in place prior to the end of the 20XX income year, although interest on the loan had not been charged during the 20XX income year. Whilst assessable income had not previously been generated in respect of the asset, the income is negligible compared to the sales revenue generated by Company A Ltd and is not closely linked to its business identity. The interest is simply a function of providing finance to its subsidiary and not part of a change in business activities. In any case, Company A Ltd first held the loan before 30 June 20XX, and it had been provided to Company A Overseas Ltd with the intention of deriving a return through interest income.

While the acquisition of Company A Overseas Ltd has given rise to a new core asset, being the shares in Company A Overseas Ltd, Company A Ltd has not generated income directly through this asset during the BCT Period. It has not received any return from the shares in the form of a dividend or paying out of profits. It would follow that there has not been a change in the generation of assessable income because of Company A Ltd acquiring the shares in Company A Overseas Ltd.

The core assets, being the website-based platform and goodwill, have generated the vast majority of assessable income throughout the BCT Period. Furthermore, whilst these core assets have expanded throughout the BCT Period due to organic development and commercialisation, they are fundamentally the same assets that existed at the test time. The generation of ancillary sources of income (e.g., the management fees and interest on the working capital loan) are arguably merely incidental to Company A Ltd's core assets and are not closely (directly) linked to the identity of its business.

The Commissioner accepts that the extent to which the assets used to generate assessable income throughout the BCT Period and just before the test time were consistently, mainly the same assets used in the business such that the assets used during the BCT Period and just before the test time were not at any time significantly dissimilar to any other time they were used.

Second factor: compares the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously

For the purposes of the modified Similar Busines Test the second factor compares the extent to which the activities and operations from which assessable income generated during the BCT Period were also those from which assessable income was previously generated at the test time. Where a company continues to carry out those same income generating activities and operations, this factor would indicate that the business remains similar to that previously carried on.

LCR 2019/1 acknowledges that when considering the activities and operations undertaken to generate assessable income, when the same activities and operations are continued, despite performing them in a different or more efficient way due to innovative improvements, it would be indicative that there has been a continuation of a similar business.

It is clear from the facts that there has been no material change in the income generating activities of Company A Ltd. All sales income is generated primarily through the website that has been in constant development through the BCT Period and just before the test time.

Whilst there is a focus on improving the efficiencies of the website through automation and

integration with client's websites, it is clear that there has not been a change in the underlying activities that are generating income - activity A and the company's other product offerings.

Product offerings

The same 10 product offerings have remained available and sold to customers throughout the BCT Period. No offerings have been added or discontinued in that time. Whilst there have been some changes in the way that products are offered (i.e., through improvements in automation via the company's website), there has not been a wholesale evolution in these income generating activities.

Company A Overseas Ltd management fees

The management fee represents less than 3% of the sales revenue generated by Company A Ltd in Australia in the trial year. Given the low quantum, it is unlikely that this additional activity would lead to the deeming of the business to be dissimilar during the BCT Period compared to the test time based on this matter alone.

Job Keeper Revenue

During the BCT Period Company A Ltd generated Job Keeper revenue of approximately $700,000. The Job Keeper revenue was provided to Company A Ltd as part of the Federal Government COVID-19 stimulus package that Company A Ltd qualified for because of a reduction in revenue. A factor in the tests requires the assessment of the extent to which the activities and operations from which its current business generated assessable income throughout the BCT Period were also the activities and operations from which its former business just before the test time generated assessable income. It is clear that the Job Keeper revenue has not been generated because of the activities and operations of Company A Ltd's business but as a result of Federal Government stimulus actions during a pandemic.

None of the above factors alone or in combination suggest a material change to the main source of income from which a majority of assessable income was earned during the BCT Period and just before the test time.

Third factor: compares the current identity of the business with that of the business carried on before the test time

For the purposes of the modified similar business test the third factor will compare the identity of the business throughout the BCT period with that of the business carried on before the test time.

A business would remain relatively similar where new activities have not resulted in the identity of the business changing. The fundamental identity of Company A Ltd's business throughout the BCT Period is that of a web-based business. However, the following changes occurred during the BCT Period that require consideration to determine whether these changes altered the identity of Company A Ltd.

Acquisition of Company A Overseas Ltd

The acquisition of the business from Company C Overseas Ltd by Company A Overseas Ltd after the test time resulted in the group expanding into a new market (OS Country) with new client. Since that time, there has been a clear demarcation between the Australian business and the OS Country business and their respective customers. For instance, Company A Ltd did not provide any services directly to customers in OS Country during the trial year. In any case, an expansion into OS Country was already contemplated prior to the loss year with the signing of the business purchase agreement with Company C Overseas Ltd and, therefore, it is reasonable to suggest that Company A Ltd already had an international presence. Furthermore, Company A Ltd undertakes its web based business in numerous countries and therefore the acquisition of Company A Overseas Ltd, and the commencement of its OS Country-based business after the test time, would arguably not transform the identity of what was already an international ready business.

It is clear that the new business from OS Country customers is generated from the existing assets and processes used during the test time. Company A Overseas Ltd provides materially the same product offerings as Company A Ltd and has adopted the Company A Ltd branding (e.g., business name and logo) and platform. As far as the offering to customers, the expansion into OS Country can be seen as a geographical expansion by the group into a new market that has not resulted in a change in the identity of Company A Ltd's Australian business.

Change in revenue mix

The majority of Company A Ltd's revenue has been generated from its web based business throughout the BCT Period.

However, Company A Ltd has made concerted efforts to increase the revenue from other activities throughout this period through advertising and targeted marketing. This is demonstrated by the revenue from web based business as a proportion of sales reducing from 92% of sales at the test time to around 74% of sales revenue during the trial year. There has been no change in the product offerings that has affected the change, but, rather, the change in the revenue mix is a result of Company A Ltd corporate strategy to increase revenue diversity through increasing sales of the other product lines.

On the basis that the products offered to customers for the entire BCT Period remained constant and just before the test time, there has not been a change in the identity of the business from a product offerings perspective Company A Ltd has transitioned from being principally sourced from activity A, to that of a company offering a broader product range given that a large amount of the growth that Company A Ltd has achieved is a direct result of the increase in these other product offerings. However, most of the revenue continued to be derived from the web based business throughout the BCT Period and additional offering was always part of Company A Ltd's strategy. It therefore appears that the identity of the business has not changed to a degree that it could be considered that a new business identity has emerged because of changes in the composition of Company A Ltd's revenue mix.

Change in customers

Whilst changes in the customer base may mean no more than a mere refocusing of attention on the most profitable segments of the company's business, a substantial change in the mix of customers can be indicative that there is a discontinuation of the original business's identity.

There has been a significant increase in the customer numbers between the test time and the trial year.

While the customer base has increased substantially, the proportion of business to individual customers has remained consistent. In addition to the customer mix remaining steady, Company A Ltd retained a large portion of its business customers throughout the BCT Period. This increase in customer base is consistent with the increase in sales revenue over that time.

These factors provide an indication that Company A Ltd's target market has remained consistent throughout the BCT Period, which in turn suggests that there has been a continuation of (no significant change to) the business's identity.

Change of directors and staff

A change in the directors and senior management of a company will usually follow a failure of the COT due to a change in ownership. Whilst a wholesale change in the management of a company may be indicative that there has been a change in the identity of a business, it has generally been regarded as a less significant factor in determining whether there has been a change in the business under the more stringent same business test (SBT). At paragraph 61 of Taxation Ruling TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 the Commissioner states:

Changes in the directors and/or management of the taxpayer. This was a factor considered in Avondale Motors. Generally speaking, however, it has little significance as it is usually follows a change in ownership, regardless of what business is carried on, but its absence could point to a favourable answer to the question posed by the same business test...

There have been material changes in Company A Ltd's board when comparing just before the test time, the 20XX loss year and the trial year. At the test time the board consisted of XX directors which had reduced to by the trial; some of which were part of the original board. During the trial year there were additional appointments and changes including another of the original directors at the test time stepping down. Although there has been some movement in the board, many of the senior staff and executives have remained at Company A Ltd in other leadership roles. Company A Ltd has maintained the same CEO, General Counsel, IT Manager and Head of Marketing throughout the BCT Period with other executives remaining with the business in various roles.

Whilst there have been some material changes in Company A Ltd's board, the company has maintained several board appointments in addition to retaining several key senior staff. Therefore, it is reasonable to conclude that these changes would not have such an impact on the business of Company A Ltd to alter its identity substantially.

There has been a reduction in overall staff numbers during the trial year, despite an increase in the volume of clients. This has been due in large part to improvements in the company's technology and automation, which has reduced manual processing by staff. Large changes in staff can be an indicator of a change in business identity where staff are terminated or moved into entirely new roles. However, there can be a rationalisation of staff numbers due to improvements in business. Given the small change to staff numbers and the rationale behind reducing staff, this would be an indicator that the business has not materially changed in identity.

The Commissioner accepts that the above has not resulted in the identity of the business changing significantly such that this factor would indicate that the business identity has remained primarily similar through the BCT period and just before the test time.

Fourth factor: requires an assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business

Development of former business

The last factor requires an assessment of the extent to which the changes to the business came about because of the commercialisation or development of assets, products, processes, services, or marketing. This final factor assesses the nature of any changes that have happened, whereas the first three factors are concerned with the aspects of the business that have continued.

Changes in the business resulting from the development or commercialisation of such things would not, in themselves, cause a business to be considered dissimilar. It is important that there is a connection between the former and current business and that any changes are a part of a natural development and growth. Decisions that are made purely because they make commercial sense or are good business opportunities are not examples of a natural development, instead it should involve the furtherance of the activities of the former business.

New technology

A notable change to Company A Ltd's business is its focus on utilising new technology to streamline and improve its business. Company A Ltd's major focus has been on workflow automation through its website. This has enabled the processing of a larger activity from activity A with roughly the same number of staff.

There has also been a push towards integration of their software on the backend of customer websites to create a smoother experience. Integrated sales now contribute to around 10% of sales revenue, however, these are predominantly sales that would have otherwise been made through the Company A Ltd website. Cloud based storage and security has been adopted over the BCT Period to ensure that Company A Ltd was utilising the most efficient and secure technology available.

As noted above, the utilisation of technology to improve efficiency of a product would not cause a failure of the similar business test if the product supplied is sufficiently similar and simply represents an improvement in delivering the product and the number of ways in which it can be delivered. The final product delivered to the customer during the BCT Period and just before the test time has not changed materially, only the mechanism of generating the product has changed i.e., the company has sought ways to continually improve. As the similar business test is designed to encourage businesses to innovate in such a way, the Commissioner accepts that under this factor Company A Ltd carried on similar busines through the BCT period and just before the test time.

Similar Business Test- Integrity Measure

Notwithstanding the above a company does not satisfy the similar 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 *business continuity test period a business that is similar to the business it carried on immediately before the test time.

The facts indicate that the business activities carried on by Company A Ltd throughout the BCT period did not change substantially and the company did not start to carry on a new business. All transactions Company A Ltd entered into during the BCT period and just before the test time related to the carrying on of its main activity A business.

Similar business test - conclusion

In conclusion it is the Commissioners view after balancing the four factors that Company A Ltd has carried on a similar business (a web based platform), using primarily the same assets (albeit while continually looking to improve the technology used) throughout the BCT period and just before the test time. Accordingly, Company A Ltd passes the BCT test in section 165-211 of the ITAA 1997 (as modified by section 707-10 and 707-125) in respect of the tax losses incurred in the financial year ended 30 June 20XX.

As the BCT is passed, the losses incurred by Company A Ltd for the financial year ended 30 June 20XX can be transferred to Company A Ltd as the head company of the Company A Ltd TCG.