Edited version of private advice

Authorisation Number: 1052237804232

Date of advice: 2 April 2024

Ruling

Subject: Carried forward losses and business continuity test

Issue 1

Question 1

Does the company satisfy the business continuity test (BCT), under section 165-211 of the Income Tax Assessment Act 1997 (ITAA 1997), throughout the relevant times in respect of the carry forward tax losses incurred during the relevant income years, such that they would be eligible for utilisation by the company in the relevant income year?

Answer

Yes

Question 2

Would the sale of Product B by the company during the relevant income year impede the satisfaction of the BCT under section 165-211 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

XXXX

The scheme commenced on

XXXX

Relevant facts and circumstances

1.    The company is a leading global provider of goods and services with a presence in multiple countries.

2.    The company's Australian operation comprises the company as the head entity of a tax consolidated group and its wholly owned Australian subsidiary.

3.    The company offers goods and services targeting a particular client base.

4.    Over the years, it has developed products. More recently, it has developed a newer product, which represents an evolution from the same ongoing development of the first product, Product A.

5.    The underlying business intentions and purpose of the company has always been to develop and commercialise products that benefit the client base.

6.    On X date, the company was 100% acquired by a non-resident company who is now the parent entity of the company.

7.    The company is continually developing its products that has led to the development of a newer product, Product B

8.    The 2 products share the same architecture and components.

9.    Product A remains the predominant source of revenue for the company.

10. The company has shared the same products and services for a few years. That is, the nature of the products and the identity of the customer base have not changed.

11. The company's customers and customer base have been maintained throughout the relevant periods.

12. The underlying business intentions and purpose of the company has always been to develop and commercialise products that benefit the same customer base. This is achieved through the development and commercialisation of its products.

13. The company's key characteristics have remained the same since before its acquisition, i.e., development and commercialisation.

14. The company added to its assets, by developing Product B shortly after the acquisition date.

15. Since being acquired by its parent entity, the company has not undertaken any acquisition and the business growth has been organic as it has moved from development to commercialisation.

16. The company has built market penetration over the ownership testing period to become a leading provider in the Australian market.

17. The company has expanded into other countries.

18. Product B draws on components from Product A.

19. The income stream from both products are the same.

20. The company will continue to derive income from the same income source.

21. The company will keep the same customer base within the same industry.

22. There will be no changes to the company's operations and activities.

23. The company plans to further undertake the development of Product B

24. The company is now contemplating the sale of Product B.

25. The sale of Product B is a commercial decision and will be to a related entity.

26. The company will continue to undertake development and commercialisation activities of its products.

27. The company incurred tax losses for a number of income years prior to being acquired by its new parent entity and therefore failed the continuity of ownership test.

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 165-211

Income Tax Assessment Act 1997 subsection 165-211(2)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Does the company satisfy the Business Continuity Test (BCT), under section 165-211, throughout the relevant times in respect of the carry forward tax losses incurred during the relevant income years, such that they would be eligible for utilisation by the company in the year ended XXXX?

Summary

The company satisfies the BCT throughout the relevant times under section 165-211, in respect of the carry forward tax losses incurred during the relevant income years, such that it would be eligible for utilisation by the company in the year ended XXXX.

Detailed reasoning

1.    You have advised that the Continuity of Ownership Test (COT) was failed when the parent entity bought the company.

2.    Where a loss company fails the COT, section 165-13 provides for the circumstances in which a company may rely on the BCT to deduct the tax losses incurred prior to failing the COT conditions.

3.    Section 165-13 provides that the company cannot deduct losses of previous years unless it satisfies the BCT, which requires a comparison between the activities of the company during the income year (called the BCT period) with its activities immediately before the 'test time'.

4.    The test time for applying the BCT depends on which of the 3 items in the table in subsection 165-13(2) applies to the circumstances of the loss company. For the company, the test time is when COT failed, i.e., the acquisition date and ends in the income year in which the company wants to use the loss, which for the company is XXXX. In this regard, the BCT requires the identification of the business being carried on by the company immediately before the acquisition date and the business carried on by the company throughout the income year ending XXXX.

5.    The company is seeking to be able to utilise the losses it made prior to being acquired by its new parent entity based on the similar business test in section 165-211 that is applicable to the period from immediately before the acquisition date until the income year ended XXXX when it will make a capital gain from the sale of Product B.

6.    Generally, a company will satisfy the BCT if it carries on the same business in the income year in which it seeks to utilise its loss as it had carried on immediately before the change of ownership (the 'test time')

7.    Subsection 165-211(2) outlines the following 4 matters (non-exhaustive) that must be taken into account in ascertaining whether the company's current business is similar to its former business:

(a)          the extent to which the assets (including goodwill) that are used in its current business to generate assessable income throughout the BCT period were also the assets 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 BCT period were also the activities and operations from 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.

8.    Paragraph 7 in the Law Companion Ruling LCR 2019/1 - The business test - carrying on a similar business (LCR 2019/1) provides guidance on the application of section 165-211 and describes 'similar' as follows:

The meaning of 'similar' depends on the context in which the term arises.[11] 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.[12] 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 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. [emphasis added]

Business assets

9.    The assets used by the company up until immediately prior to the acquisition date included intellectual property and other assets.

10. Shortly after the acquisition date, the company added Product B to its assets which shared the same components of its architecture with Product A.

11. The company has developed Product A and more recently, Product B.

12. It has continued to develop Product B which represents an evolution from the same ongoing development which produced the Product A.

13. The company has been continually developing its products over many years that services the same industry and customer base. This has resulted in the development of other products, including Product A and Product B, and is likely to result in further products.

14. There have been minor changes to furniture and fittings, office equipment and leasehold improvements but these are not critical to the identity of the business. Therefore, any minor changes to these assets do not affect changes to the identity of the business.

15. The assets used by the company to generate its assessable income throughout the BCT period, therefore, are the same assets used in the company's operations to generate assessable income at test time (COT failure, change of ownership).

Current and former activities and operations

16. The company has provided the same product / service for many years. That is, the nature of the products and the identity of the customer base have not changed other than it has expanded through increased market penetration, product improvements and development and commercialisation of new products.

17. The client base has remained consistent over the years, including keeping its major clients.

18. The income generating activities and operations undertaken by the company throughout the BCT period involved the development of products and generating revenue from the products.

19. Despite having undertaken developmental activities relating to Product A only, immediately prior to the change of ownership, the income generating activities and operations used to generate assessable income at the test time (COT failure, change of ownership) has remained the same.

20. Accordingly, the income generating activities remain similar throughout the BCT period as they did at test time.

Identity of the business

21. The identity and character of the business of the company has always been to develop and commercialise products to be used in the same industry. This is achieved through the development and commercialisation of solutions and products.

22. Business growth has been organic as it has moved from development to commercialisation. The company's customer base and business is considered to have remained the same throughout the relevant periods. The sale of Product B will not result in any discontinuation of any of the company's products or services.

Commercialisation

23. Throughout the BCT period, the company has continued to develop and commercialise products.

24. The company has leveraged the success of Product A to further extend Product A offerings to the same industry,

25. Product B provides greater capabilities then previously developed products.

26. The continuing development is what has caused the expansion of the company into overseas markets while the income derived from commercialisation of the product continues to be from the same source.

27. The development and commercialisation of the product benefits the same client base and industry. Therefore, it is considered that the same business existed prior to being acquired by its new parent entity as the business carried on at the test time. (COT failure, change of ownership).

Conclusion

28. Taking into account the 4 matters listed in subsection 165-211(2), the company's current business is similar to the business conducted before COT failure, such that it satisfies the BCT (similar business) under section 165-211. Accordingly, the company is able to utilise the carry forward losses incurred during the relevant income years to offset the capital gain that is expected to be made when Product B is sold in the year ending XXXX.

Question 2

Would the sale of product B by the company during the relevant income year impede the satisfaction of the BCT?

Summary

The planned sale of product B in the relevant income year will not impede the satisfaction of the BCT under section 165-211.

Detailed reasoning

29. The company intends to sell Product B in the relevant income year. Subsequent to the sale, the company will:

(a)          continue to develop Product A and Product B.

(b)          continue to undertake development activities of its products

(c)           continue to derive income from the same source and activities.

30. As the sale of Product B will not result in any changes to the identity of the business, use of assets, continuity of business activities and the naturally occurring development and commercialisation of the products will continue, the sale of Product B will not cause the company to fail the BCT in subsection 165-211(2) for the relevant income year.