Edited version of private advice

Authorisation Number: 1052277194968

Date of advice: 17 July 2024

Ruling

Subject: Similar business test

Question 1

Will Company A satisfy the business continuity test under section 165-211 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 202X to 202X income years in order to utilise the tax losses incurred by it in the 202X income year?

Answer

Yes.

This ruling applies for the following periods:

1 July 202X to 30 June 202X

The scheme commenced on:

XX XX 202X

Relevant facts and circumstances

Company A was incorporated in Australia on XX XX 20XX.

Company A is wholly owned by a non-resident company, Company1.

On XX XX 202X, Conpany1 was 100% acquired by Company2 (Acquisition), which is another non-resident company.

Sole business

Immediately before the Acquisition and since the Acquisition:

•         The sole business of Company A was the resale of a product and provision of certain services to a particular customer base;

•         Company A did not undertake any other business activity, and has not discontinued or added products or services;

•         The function of Company A's product has remained the same;

•         Company A has maintained the same business name; and

•         Company A has not conducted any business activity outside of Australia.

Business assets

Immediately before the Acquisition and since the Acquisition:

•         Company A retained the same types of business assets;

•         Company A's goodwill remained unchanged; and

•         Company A's right to resell the product to its customer base remained the same.

Advertising

Immediately before the Acquisition, Company A advertised its product on a website that was controlled by a related party.

Since the Acquisition, Company A advertised its product on a website that was controlled by another related party.

Employees

Immediately before the Acquisition, Company A had direct employees to undertake its business activity.

Since the Acquisition, Company A no longer had any direct employees and used employees of another related party to carry out its business activity.

Directors

Immediately before the Acquisition, Company A had X number of directors.

Since the Acquisition, Company A has had a different number of directors as a direct result of the Acquisition.

Customers

Immediately before the Acquisition, Company A had X number of customers.

Since the Acquisition, Company A's customers increased due to natural expansion of its business, but the customer base has remained the same.

Tax losses

Company A incurred tax losses in the 202X income year (Tax Losses). Company proposes to utilise the Tax Losses in the 202X to 202X income years.

Failure of COT

Since the Acquisition, Company A:

•         failed the continuity of ownership test (COT) under section 165-12 of the ITAA 1997;

•         was unable to apply the special alternative to the COT under section 165-215 of the ITAA 1997; and

•         was not a widely held or eligible Division 166 company for the purposes of applying the modified tests in Subdivision 166-A of the ITAA 1997.

Other matters

Before the Acquisition:

•         Company A did not start to carry on a business it had not previously carried on; and

•         Company A, in the course of its business operations, did not enter into a transaction of a kind that it had not previously entered into.

Relevant legislative provisions

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 subsection 165-13(2);

Income Tax Assessment Act 1997 section 165-210;

Income Tax Assessment Act 1997 section 165-211;

Income Tax Assessment Act 1997 subsection 165-211(1);

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

Income Tax Assessment Act 1997 paragraph 165-211(3).

Does IVA apply to this private ruling?

Part IVA of the ITAA 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

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

COT

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

(a)           it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or

(b)           it meets the condition in section 165-13 (which is about the company satisfying the business continuity test).

2.         Company A failed the COT under section 165-12 and was unable to apply the special alternative to the COT under section 165-215. Further, Company A was not a widely held or eligible Division 166 company for the purposes of applying the modified tests in Subdivision 166-A. Therefore, Company A will only be entitled to deduct its Tax Losses if it meets the conditions of the 'business continuity test' in section 165-13.

Section 165-13

3.         Subsection 165-13(2) makes reference to a defined term 'test time'. In this case, item 1 of the table in subsection 165-13(2) is the relevant item which provides:

(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: Test times

4.         Subsection 165-12(1) provides that in determining whether section 165-10 prevents a company from deducting a tax loss, the 'ownership test period' is the period from the start of the loss year to the end of the income year.

5.         Company A's 'ownership test period' is 1 July 202X to 30 June 202X (i.e. the year in which it incurred the Tax Losses). Company A's 'test time' is therefore XX XX 202X.

6.         Subsection 165-13(2) also make references to defined terms 'business continuity test' and 'business continuity test period'.

Subdivision 165-E

7.         Pursuant to Subdivision 165-E, the 'business continuity test' is satisfied by a company meeting the conditions of the 'same business test' in section 165-210 or the 'similar business test' (SiBT) in section 165-211.

8.         Company A has not requested the Commissioner to consider the 'same business test' in section 165-210 under this ruling. Hence, in order to utilise the Tax Losses, Company A must satisfy the SiBT.

9.         Section 165-211 sets out the SiBT. Subsection 165-211(1) relevantly provides:

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 2015; or

...

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).

10.      Company A incurred the Tax Losses during the 202X income year (i.e. an income year starting on or after 1 July 2015).

11.      To determine the 'business continuity test period', the Explanatory Memorandum to the Treasury Laws Amendment (2017 Enterprise Incentives No.1) Bill 2017 confirms at paragraph 1.19 that the 'business continuity test period' is, subject to certain conditions, the income year in which a company wants to use a loss:

Generally, a company satisfies the similar business test if the business it carries on throughout the income year when it wants to use a loss (the 'business continuity test period') is similar to the business it carried on at the time immediately before the change of ownership or control that caused the company to fail the continuity of ownership test (the 'test time').

12.      Company A's 'business continuity test period' will be each income year in which it wants to utilise the Tax Losses.

13.      Subsections 165-211(2) and (3) further provide that:

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.

14.      Having considered subsections 165-211(2) and (3), the Commissioner is satisfied that Company A's current business is similar to its former business and that subsection 165-211(3) does not apply.

Conclusion

15.      In conclusion, Company A passed the 'similar business test' set out in section 165-211 throughout each 'business continuity test period' in order to utilise its Tax Losses.