Edited version of private advice

Authorisation Number: 1052254374673

Date of advice: 28 May 2024

Ruling

Subject: Carry forward company losses - same or similar business test

Question

Did Company A satisfy the business continuity test under section 165-13 of the Income Tax Assessment Act 1997 such that it can recoup tax losses incurred in previous years?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

Relevant facts and circumstances

1.    Company A is a wholly owned subsidiary of Company B.

2.    Company A was formerly trading in the name of C. In XX 20XX, C formally changed its name to Company A.

3.    Company B is the parent company of a number of wholly owned and partly owned subsidiaries. However, a tax consolidated group (TCG) for the purpose of the Income Tax Assessment Act 1997 ('ITAA 1997') was not created.

4.    Company B implemented the Division 7A restructure arrangements on XX June 20YY resulting in a change in ownership of Company A.

5.    Company A incurred tax losses from previous income years.

Business activities

6.    Company A carries on its business in its particular industry.

7.    Company A's tangible and intangible assets are used to the same degree prior and after the change of ownership.

8.    Company A's core business activity continue to generate income to the same degree.

9.    Company A's overall identify of business remains sufficiently similar.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 36-25

Income Tax Assessment Act 1997 section 165-10

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 section 165-210

Reasons for decision

Question

Did Company A satisfy the business continuity test under section 165-13 of the Income Tax Assessment Act 1997 for the year ended 30 June 20YY such that it can recoup tax losses incurred in years ended 30 June 20YY, 20YY and 20YY?

Summary

Company A satisfied the business continuity test under section 165-13 such that it can recoup tax losses.

Detailed reasoning

The continuity of ownership or business continuity test

NB: all future legislative references are to the ITAA 1997 unless otherwise stated.

Section 36-25 sets out special rules about tax losses. Item 2 of table 2 of section 36-25 refers to the relevant tests in Subdivision 165-A and specifies the special rules around the situation where a company wants to deduct a tax loss:

A company wants to deduct a tax loss. It cannot do so unless:

• the same people owned the company during the loss year, the income year and any intervening year; and
• no person controlled the company's voting power at any time during the income year who did not also control it during the whole of the loss year and any intervening year;

or the company has satisfied the business continuity test.

Subdivision 165-A stipulates the rules around the deductibility of tax losses of earlier income years.

Section 165-10 provides that a company cannot deduct a tax loss unless either:

(a)  it meets the conditions in section 165-12 (the Continuity of Ownership Test ('COT')); or

(b)  it meets the condition in section 165-13 ('the Business Continuity Test').

Company A submitted that it failed the COT XX June 20YY. Therefore, Company A cannot deduct the tax losses incurred in the prior income years unless it satisfies the Business Continuity Test.

The Business Continuity Test

A company can satisfy the Business Continuity Test by satisfying one of two 'limbs' being:

•         carrying on the same business under the test in section 165-210 (the same business test ('SBT') or

•         carrying on a similar business under the test in section 165-211 (the similar business test (SBiT).

Business Continuity Test Period and the Test Time

To apply the Business Continuity Test, the Business Continuity Test period and the Test Time need to be established. Section 165-13 defines the Business Continuity Test period and the Test Time.

Subsection 165-13(2) states that the Business Continuity 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):

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.

Table 1: The test time is determined by the table provided by subsection 165-13(2):

The SBT

Section 165-210 states:

The business continuity test--carrying on the same business

(1) A company satisfies the business continuity test if throughout the *business continuity test period it carries on the same *business as it carried on immediately before the *test time.

(2) However, the company does not satisfy the *business continuity test under this section if, at any time during the *business continuity test period, it *derives assessable income from:

(a) a *business of a kind that it did not carry on before the *test time; or

(b) a transaction of a kind that it had not entered into in the course of its business operations before the *test time.

(3) The company also 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 the same business as it carried on immediately before the test time.

To satisfy the SBT in section 165-210, the taxpayer must be able to satisfy the following sub-tests:

•         The Same Business Test (a positive test) - the company must carry on the same business during the Business Continuity Test Period that it carried on immediately before the Test Time (subsection 165-210(1))

•         The New Business Test (a negative test) - the company must not derive assessable income from carrying on a business of a kind that it did not carry on before the Test Time (paragraph 165-210(2)(a))

•         The New Transactions Test (a negative test) - the company must not derive assessable income, in the course of its business operations, from a transaction of a kind that it had not entered into before the Test Time (paragraph 165-210(2)(b)), and

•         The Anti-Avoidance Test - the company did not commence certain business activities before the Test Time for the purpose of satisfying the SBT (subsection 165-210(3)).

The first three of the above sub-tests form a descending hierarchy that first tests the business of the company as an entirety (its 'overall business'), then the component undertakings or enterprises, if any, of that business and, finally, the individual transactions by which the business is carried on.

The Commissioner's views concerning the application of the SBT and each of the sub-tests are set out in 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 ('TR 1999/9').

Paragraphs 59 and 60 of TR 1999/9 set out the relevant considerations:

Paragraph 59 provides that in determining whether the same business is being carried on is a question of fact and degree. Significant weight is given to changes after the change-over in the income producing product or service of the taxpayer, how it is produced, acquired or provided and/or changes in the market for that product or service. But even these are a question of fact and degree often to be decided in the context where some expansion or contraction would be expected.

Paragraph 60 provides that the following factors are relevant in determining whether a taxpayer has satisfied the SBT:

(a) Identifying the business carried on by the taxpayer at the change-over involves identifying with specificity the actual business activities carried on and transactions entered into by the taxpayer at the change-over.

(b) The business carried on by the taxpayer is not characterised by reference to business activities or transactions that the taxpayer intended to carry on or enter into before the change-over, or that the taxpayer had power or expressed the intent to carry on or enter into under its constituent documents before the change-over, if the evidence discloses the taxpayer did no, in fact, carry on those activities or enter into those transactions at or before the change-over.

(c) There is a distinction between a change of business and a 'mere change in the process by which [the business] is carried on'. A change in the taxpayer's business operations or processes that affects the identification of the taxpayer's business by going beyond a mere change in the way in which the business is carried on, it is likely to result in a change in the business itself.

(d) An expansion or contraction of the taxpayer's business activities may not, in itself, result in a change in the identity of the business carried on by the taxpayer. However, the expansion or contraction of activities may result in a change in the identity or character of the business, taking into account the nature and extent of the expansion or contraction. In particular, the organic growth of a business through the adoption of new compatible operations in the ordinary way and, similarly, the discarding of old operations in that way, may not cause a taxpayer to fail the same business test, but a sudden and dramatic change brought about by the loss or acquisition of business operations on a considerable scale is likely to do so.

(e) The discontinuance during the period of recoupment, whether by way of cessation or sale, of a significant part of the business that was carried on by the taxpayer at the change-over, is likely to result in the company failing to satisfy the SBT.

(f) The commencement or acquisition, by merger or otherwise, of new undertakings (including going concerns and similar or complementary undertakings) may cause a company to fail the SBT, e.g., if the result is to alter the character of the overall business.

(g) Other factors relevant to the issue of whether the same business is being carried on after the change-over include the name of the taxpayer, the location of the business, the existence of a period or periods of dormancy, and the circumstances accounting for the inactivity and in which activity is resumed, the extent to which there is continuity of, or change in, custom and goodwill.

(h) Where the taxpayer's activities have wound down to the extent that justifies a finding of fact that the taxpayer had ceased to carry on a business, either at the change-over or before or during the period of recoupment, the taxpayer does not satisfy the SBT.

(i) Whilst the business carried on by one company in a commonly owned or controlled corporate group is not characterised by reference to the business of the group as a whole, changes in the businesses or identities of other companies in the group may result in a change of business.

The similar business test (SBiT)

Section 165-211 sets out the SBiT.

Subsection 165-211(1) states that a company also satisfies the Business Continuity Test in relation to a tax loss for an income year starting on or after 1 July 2015 if throughout the Business Continuity Test period it carries on a business that is similar to the business it carried on immediately before the Test Time.

Subsection 165-211(2) provides the following factors 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 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.

The Commissioner's views on the SBiT are discussed in Law Companion Ruling LCR 2019/1 The business continuity test - carrying on a similar business.

Paragraph 7 of LCR 2019/1 states 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.

Paragraphs 9 to 14 of LCR 2019/1 discuss four factors that must be considered, and these factors require a comparison between the essential characteristics of the business before and after the relevant change in ownership or control. The weight to be given to each factor depends on the facts and circumstances of each case. 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.

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.

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.

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.

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.

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.

However, subsection 165-211(3) sets out that a company does not satisfy the Business Continuity 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 purposes, or for purposes including the purpose, of being taken to have carried on through the Business Continuity Test period a business that is similar to the business it carried on immediately before the Test Time.

Application to your circumstances

The Commissioner considers that Company A satisfied all the requirements of the SBiT in section 165-211. As a result, Company A satisfies the Business Continuity Test as provided for in section 165-13 such that it can recoup tax losses in the income year 30 June 20YY.