Edited version of private advice

Authorisation Number: 1052162131904

Date of advice: 17 November 2023

Ruling

Subject: Income tax - same business test

Question 1

Are you still considered to be running a business for the purposes of accessing subdivision 165-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

When considered against the factors outlined in TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1) your activities are considered to be of those carrying on a business.

According to paragraphs 38 and 39 of TR 2019/1, a company can still be held to be carrying on a business even when the activity is relatively limited, irregular or has periods of inactivity. Paragraph 55 of TR 2019/1 explains that where activities are paused, even for a lengthy period and where there is an intention to resume them is not likely to have ceased carrying on a business.

In your case, you have temporarily paused your business activity as you are searching for new land for development purposes to generate profit. You have a clear intention to resume your operations once you purchase new land. Therefore, we do not consider that you have not discontinued carrying on your business.

Question 2

When resulting in a profit, are you able offset the previous years' losses under section 165-10 of the ITAA 1997?

Answer

Yes.

Assuming that there is no change in circumstances in the 20XX-XX and 20XX-XX financial years, you satisfy the criteria under section 165-10 of the ITAA 1997.

To deduct a tax loss, you either need to maintain the same owners (section 165-12 of the ITAA 1997) or satisfy the business continuity test (section 165-13) of the ITAA 1997.

In your case, you did not maintain the same owners for the entire test period as the shares were transferred to Person A during the test period. You did not hold more than 50% of the shares for the entire test period.

Paragraph 47-48 and 43 of TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 16 5-35(b), section 165-126 and section 165-132 (TR 1999/9) raises about if the entity ceases to carry on a business or if it is merely inactive. Paragraph 53 of the TR 1999/9 then goes on to explain it would depend on if the company is actively holding itself out for business and if there is the expectation of a resumption of active operations within a reasonable time. In your case, you have been looking for opportunities to purchase new land for your next development opportunity which is expected to occur during the 20XX-XX financial year.

Paragraph 60 of TR 1999/9 provides guidelines on if the same business test has been satisfied. In your case, the same activities have been conducted and will be conducted in the future being that of land and/or property development. Therefore, as you pass the same business test you have satisfied the business continuity test.

Question 3

Is there any limitation on applying the previous years' tax losses to offset the profit?

Answer

Yes.

There is no limitation to be able to offset the tax losses against the profit as long as you continue to satisfy the conditions in section 165-10 of the ITAA 1997, being you continue to maintain the same owners, or you satisfy the business continuity test.

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a company that commenced a business activity of property development on a specified date.

You purchased a development block on a specified date, which you then sold during the 20XX-XX financial year.

You sold the development as continuing with the development project would result in a greater loss than selling the land.

After you sold the land, you downsized your business whilst looking for an opportunity to invest to purchase land for property development.

You however realised that continuing with this project would result in greater loss than selling the land, so you decided to dispose of the land in 20XX.

You provided us with your carried forward losses as at 30 June 20XX.

On a specified date, your sole director, Person A, acquired 100% of your shares from the sole shareholder, Person B.

You will purchase a development block by a specified date.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 165-210

Income Tax Assessment Act 1997 section 165-211

Income Tax Assessment Act 1997 section 165-10

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13