Edited version of your written advice

Authorisation Number: 1051469386740

Date of advice: 15 January 2019

Ruling

Subject: Consolidation - Losses - Loss utilisation - Tax losses - Same business test

Question 1

Does ABC Pty Limited (ABC) satisfy the same business test under section 165-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 201A to 201D income years with respect to the tax losses carried forward as at the test time?

Answer

No. ABC only satisfies the same business test (SBT) for the 201A same business test period. ABC does not satisfy the SBT for the 201B to 201D same business test periods.

This ruling applies for the following income year(s)

1 July 201B to 30 June 201D

The scheme commences on

1 July 20XX

Relevant facts and circumstances

ABC registration and directorship

1. ABC is an Australian proprietary company. ABC is the head company of an income tax consolidated group (ABC TCG) which consolidated on 1 July 20XX. At one point before its contraction (explained further below), the membership of the group had comprised of ABC and XX other wholly owned subsidiaries. As at the date of the ruling application, the ABC TCG had only X subsidiary members.

2. As at 30 XX 20XX, X and Y were directors of ABC. X was previously an executive at XYZ Pty Ltd (XYZ) and head of a particular asset division at XYZ. Y was previously an executive of XYZ and head of another asset division at XYZ. Y was also formerly a director of EFG Pty Ltd (EFG) and ABC Trust (the relevance of these entities are explained further below).

3. ABC was wholly-owned by Holdco Pty Ltd (Holdco), until 1 July 20XX. On 1 July 20XX, X of the X ordinary shares in ABC were transferred to EFG. Holdco has continued to hold the remaining X ordinary shares in ABC. The XY% share in ABC held by EFG was transferred to the liquidators of EFG on XX XX 20XX. Additional ownership details are provided later under ‘Shareholding in ABC’.

Management of ABC

4. ABC Manager was appointed manager of some of the members of the ABC TCG in May 20XX. Prior to this, ABC was managed by EFG (a 100% wholly-owned subsidiary of XYZ). This management role included originating investments and projects, and bringing projects to the Investment Committee for consideration.

5. X is the current sole director of ABC Manager.

Structure of ABC and ABC Trust

6. The ABC TCG was established by XYZ for a specific purpose to enable a certain type of investment with exposure to assets of a particular industry to be offered to the public. This was in the form of units in ABC Trust.

7. Prior to the test time, other than a small amount of investments in units in ABC Trust, the ABC TCG’s business comprised of the ownership of a certain type of units in entities in the ABC Trust group which held the underlying asset.

ABC TCG’s activities before the test time

8. ABC TCG’s income before the test time comprised mainly of trust distributions and interest income. ABC’s business before the test time comprised of the ownership of the units with indirect exposure to the particular industry assets.

Collapse of XYZ

9. Just before the test time, ABC Trust was placed into receivership. Receivers were also appointed to a number of ABC’s subsidiaries. XYZ’s creditors resolved to liquidate XYZ which resulted in the transferring of the X shares in ABC that were owned by EFG to the liquidators.

Shareholding of ABC

10. ABC was wholly owned by Holdco from its incorporation until 1 July 20XX. At this date, X of the X ordinary shares were transferred to EFG (a wholly owned subsidiary of XYZ).

11. A change in shareholding at the test time in Holdco triggered a change in the majority underlying ownership of ABC.

12. ABC has carried forward tax losses which it is seeking to deduct in the 201A to 201D income years. Some of these tax losses were generated before the test time.

ABC TCG since liquidation of XYZ

13. Following the liquidation of XYZ, there was a focus on reducing liabilities and liquidating some of the assets of the ABC TCG to enable it to survive.

14. The receivership of ABC Trust and entities within the ABC TCG led to the divestment of the majority of the properties after the test time. The ABC TCG did not cease its activities as it continued to hold units in a number of entities. However, by 201A, the ABC TCG had only X property left in its portfolio.

Investments post the test time

15. Since the test time the investments undertaken by ABC have comprised of a loan to ABC Manager in 20XY and a loan to an offshore related entity of X in 201B that was used by that entity to finance acquisitions of assets from a specific industry that was different to the industry ABC previously invested in. Apart from these investments, ABC did not make any other investments, although some assets were considered. This was because of X’s preference and expertise for assets from this specific industry.

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 Section 165-210

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Question 1

Does ABC satisfy the same business test under section 165-10 for the 201A to 201D income years with respect to the tax losses carried forward as at the test time?

Summary

16. No. ABC only satisfies the same business test (SBT) for the 201A same business test period. ABC does not satisfy the SBT for the 201B to 201D same business test periods.

Detailed reasoning

17. Broadly, a head company of an income tax consolidated group can deduct a prior year loss if the company satisfies either the continuity of ownership test (the COT) or the SBT under sections 165-12 and 165-13 respectively.

COT

18. The change in shareholding in Holdco at the test time resulted in a change of the majority underlying ownership in ABC and caused a failure of the COT under section 165-12 on the same date. Therefore, in order to deduct the tax losses generated before the test time, ABC must satisfy the SBT.

SBT

19. In relation to the SBT, subsection 165-13(2) states:

The company must satisfy the same business test for the income year (the same business 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.

20. Section 165-210 provides that a company satisfies the SBT if:

● it carried on at all times during the same business test period the same overall business that it carried on immediately before the test time (the same business test); and

● it did not derive assessable income from:

● a business of a kind that it did not carry on before the test time (new business test), or

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

Same business test

21. As stated in paragraph 13 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 (TR 1999/9), the question of whether the same business is conducted is ultimately a question of fact that may give rise to questions of degree.

22. The leading case on the SBT is Avondale Motors where the term 'same' was interpreted to mean 'identical' and not merely 'the same kind of business' or 'similar' by Gibbs J at CLR 105; ATR 317; ATC 4106:

The meaning of the phrase “same as”, like that of any other ambiguous expression, depends on the context in which it appears. In my opinion in the context of the section the words “same as” import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. It seems to me natural to read the section as referring to the same business, in the sense of the identical business, and this view is supported by a consideration of the purposes of the section...

(Emphasis added)

23. In Avondale Motors, before the test time, the taxpayer carried on the business of dealer in motor parts and accessories at three different premises in conjunction with a motor dealer having franchises for certain vehicles. After that date, it carried on the same kind of business but under a different name, at different places, with different directors and employees, with different stock and plant and in conjunction with a motor dealer having different franchises. Gibbs J held that the SBT was not satisfied and the taxpayer after the changeover was conducting a different business, although one of a similar kind.

24. Avondale Motors establishes the strict nature of the SBT and the requirement for not just the “same kind” of business but the “same” business in the sense of “identical” business. This test is accepted by the Commissioner in TR 1999/9 where he explains the SBT as follows under paragraph 13:

In the same business test, the meaning of the word `same' in the phrase `same business as' imports identity and not merely similarity; the phrase `same business as' is to be read as referring to the same business, in the sense of the identical business. However, this does not mean identical in all respects: what is required is the continuation of the actual business carried on immediately before the change-over…

(Emphasis added)

25. Therefore, the SBT requires a continuation of the same business conducted before the change-over such that any changes to the business that result in a change in the identity of the business will cause a failure of the SBT.

26. The first step in applying the SBT is the correct identification of the business conducted by the company before the change-over or test time.

Classification of ABC’s business

27. The facts clearly indicate that ABC’s principal business was as a special purpose vehicle that was established to own interests in certain transactions. Apart from some units in ABC Trust, ABC invested exclusively in units in entities of ABC Trust which gave it indirect exposure to assets of a certain industry immediately before the test time; it did not invest in any other type of assets or through any other means.

28. Critically, the business of ABC before the test time did not include the provision of debt funding. The nature of ABC’s business at the test time was defined by its relationship with XYZ, evidenced by the fact that its transactions were limited to dealings with XYZ entities and that it was entitled to receive trust distributions. EFG was the manager of ABC and shared a common director with ABC in the form of Y who was also a director of XYZ. The particular nature of ABC’s business is reflected by its asset portfolio being comprised exclusively of assets connected to the XYZ Group in the form of these units.

29. The facts indicate that ABC’s new activities have comprised the making of loans to related parties of X and from the 201B income year, the provision of an interest bearing junior loan to these entities to finance the acquisition of assets of a certain industry. There have been no new investments in units or in assets of the industry previously invested in. Critically, the business now has limited dealings with XYZ.

30. The Commissioner considers that there was a failure of the SBT in the 201B year and subsequent years when ABC commenced making a junior loan to related companies. Various factors contributed to this view and the reasons for concluding this are explained below.

Change in identity

31. As emphasised in paragraph 38 of TR 1999/9, the requirement for there to be an identical business does not mean identical in every respect with the business that was carried on before the changeover. A business may be the same, even though there have been some changes in the way in which it is carried on, provided the identity of the business is not changed.

32. For the 201A income year, ABC’s identity had not changed to that immediately before the test time.

33. The Commissioner considers that the identity of the business changed in the 201B income year when it commenced making junior loans to related entities that invested in assets of a particular industry. The 201B loan resulted in a change in ABC’s direction and identity as there was a deliberate move to earn an income from a loan used to finance these assets.

34. The 201B loan was an investment that differed in character to the units ABC had earlier invested in. The character of the business had completely changed from one that was managed by EFG and exclusively transacted with XYZ entities to a much smaller scale business that used its own funds to generate returns from debt investments in associated entities of X from assets of a different industry.

35. Therefore, the Commissioner considers that ABC does not satisfy the SBT even if ABC sees itself broadly as continuing to carry on a similar kind of investment-type of business or has continued some part of its existing business operations in the recoupment years by maintaining units in one entity previously connected with XYZ. The broad description of ABC’s business as “investment in assets” is not particularly useful for the SBT which requires a continuation of the identical business and activities that make up that business rather than just a similar kind of business.

Changes to legal form

36. ABC acknowledges that the form of its investments has changed. ABC contends, on the basis of J Hammond, that the proper classification of a taxpayer’s business is its actual investments made, rather than the legal structure or form of the investment. On this basis, ABC contends that it was, and is still, an investment company which has an objective to invest in various types of businesses which have acquired assets where the return is determined by reference to the underlying asset.

37. ABC’s circumstances can be distinguished from J Hammond because its investments in the particular type of units was not an ‘inconsequential matter’ but part of its role and the purpose for which it was established by XYZ. In support of this, the Commissioner notes that prior to the test time, all of ABC’s investments (other than a relatively small shareholding in ABC Trust) were in the form of a specific type of units in entities connected with the ABC Trust. Every investment made by ABC used the same legal structure.

38. Since the changeover, ABC has no longer invested in these units. Of the investments it has made since 20XY, these have principally involved providing junior loan investments to related parties. In the Commissioner’s view, there has been a material change in the form of ABC’s investments which has manifested a change to the identity of the business:

Economic environment

39. ABC concedes there was a contraction of the business over a period but argues the contraction and change in focus in terms of its portfolio was a response to the situation it found itself in.

40. The Commissioner considers that there was a change in the identity of ABC in the 201B income year when it commenced making junior loans to related entities of X to finance assets of a particular industry. The renewed focus on growth and addition of new investments into asset categories and sectors ABC was not previously involved with is a change in the identity of the business that contributes to a failure of the SBT in the 201B to 201D income years covered by this ruling. While these changes may have been driven in some part by the economic environment prevailing at the time and the financial position ABC found itself in, they still represent actual and material changes to the business and its identity that contribute to a failure of the SBT.

41. The junior loans to finance assets of a particular industry did not take place until the 201B income year. Therefore the Commissioner is of the view that the company did not change its identity in the 201A income year. Hence the Commissioner accepts that the SBT was satisfied in the 201A income year.

Identity of manager

42. With reference to the Lilyvale Hotel case, ABC contends that the way in which its business was managed by EFG and the subsequent change of manager to ABC Manager is irrelevant to the conclusion about the nature of the business it operates. In Lilyvale Hotel, the Full Federal Court held that the taxpayer did not cease to carry on the same hotel business when at one stage it conducted the hotel business without a hotel management group and at another time did so with the assistance of such a hotel management group. The change in how it conducted its business through use of a management group was a “distinction without a difference” that had no bearing on the identification of the business which the taxpayer carried on.

43. In Lilyvale Hotel, the existence or absence of a management company to run the taxpayer’s hotel business was a change in the manner in which the taxpayer’s business was carried on that did not manifest a change in the actual business carried on by the taxpayer. The Commissioner considers that Lilyvale Hotel can be distinguished because the change in the identity of the manager did manifest a change in the actual business carried on by the company by moving the company away from the specific purpose for which it was set up and the assets of that particular industry. This is a change that goes beyond just a change in the manner the business was conducted but to the actual business itself.

44. The Commissioner considers that ABC’s business was intrinsically linked to ABC Trust and the broader XYZ Group because investment decisions were essentially made on the recommendations of XYZ who was the manager, even though it was the directors of ABC who formally authorised such investments. The demise of XYZ has enabled ABC to pursue new investment opportunities not constrained to investments identified by XYZ.

New Business Test and New Transaction Test

201A income year

45. While the Commissioner accepts that ABC satisfies the SBT for the 201A income year, ABC also is required to satisfy the New Business Test (NBT) and New Transaction Test (NTT) to satisfy the SBT pursuant to subsection 165-210(2).

201B to 201D income year

46. Since the Commissioner has concluded that ABC does not satisfy the SBT for the 201B to 201D income years, it is not strictly necessary for the Commissioner to consider the NBT or the NTT. However, for completeness both tests are considered below.

New Business Test

47. Under the NBT in paragraph 165-210(2)(a), the SBT is not satisfied if ABC during the same business test period, derives assessable income from a business of a kind that it did not carry on before the test time.

201A income year

48. The Commissioner concludes that ABC did not in the 201A income year derive assessable income from a business that it did not carry on before the test time. ABC only commenced making a junior loan to offshore related entities to finance the acquisition of asset of a particular industry in the 201B income year. The provision of the loan in the 201B income year was the commencement of a new business which ABC did not previously conduct immediately before the test time.

201B to 201D income years

49. ABC was set up by XYZ for the purpose of enabling a certain type of investment to be offered to the public. ABC would not have entered into the junior loans prior to the test time as this would have been inconsistent with this purpose. The Commissioner considers that ABC commenced a new business in the 201B income year when it made the junior loan and began to profit from the receipt of interest income from financing entities operating in the particular industry, which was the industry preferred by its director and shareholder X. The shift to investments in this new industry results in a failure of the NBT and consequently the SBT for the 201B to 201D income years covered by this ruling.

New Transactions Test

50. Under the NTT in paragraph 165-210(2)(b), the SBT test is not satisfied if ABC during the same business test period, derives assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the test time.

201A income year

51. The Commissioner concludes that ABC did not in the 201A income year derive assessable income from a transaction that it did not carry on before the test time. ABC only commenced making a junior loan to offshore related entities to finance the acquisition of assets of a particular industry in the 201B income year.

201B to 201D income years

52. The Commissioner considers that ABC did derive assessable income from entering into new transactions of a kind that it had not entered into before the test time, when it made the 201B junior loan and commenced earning interest income that year.

53. For similar reasons already explained in relation to the NBT, the 201B loan was not a transaction of a kind that could have been entered into by ABC before the test time as ABC’s investments were confined to the specific type of units and assets of a particular industry which was the specific purpose for which XYZ had established ABC.

54. Therefore, the commencement of ABC receiving interest income from the provision of junior loans in 201B results in a failure of the NTT and consequently the SBT for the 201B to 201D income years covered by this ruling.

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