The business continuity test: when is a new business sufficiently similar to its predecessor?
The Commissioner of Taxation has issued Law Companion Ruling LCR 2019/1 (Ruling) which provides guidance on the application and operation of the ‘similar business test’.
In particular, the Ruling explains the matters that must be considered when determining whether the business activities or transactions will meet the ‘sufficiently similar’ requirement and provides some useful examples which illustrate the principles.
Subdivision 165-E of the Income Tax Assessment Act 1997 sets out four factors that must be considered when determining whether the business activities or transactions are sufficiently similar.
The Ruling provides the following guidance on each factor:
1. “The extent to which the assets used to generate assessable income throughout the test period were the assets used in the business carried on at the test time”
Where there is continuity in the assets used at the test time and during the test period the similar business test is likely to be satisfied, even if the outcome or result of that use is different due to the development or commercialisation of some of those assets
2. “The extent to which the current activities and operations were also the activities and operations from which the former business generated assessable income”
Continuity of income-producing activities will indicate a similar business is being carried on. Engaging in the same activities and operations in a more efficient way as a result of business improvements will not point towards a dissimilarity.
3. “The identity between the current and former businesses”
Where new activities have not resulted in a change to the “identity” of the business, this would indicate that a similar business is carried on. The Ruling considers this factor in some of the examples provided, but no real guidance is provided regarding the scope of the term ‘identity’. We can infer however that it is intended to mean or suggest the elements of the business that help customers and the public identify or recognise the business.
4. “The extent to which any changes to the former business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business”
As the similar business test is designed to encourage innovation, these changes will not, in themselves, cause a business to be dissimilar. However, if the changes are not the result of such development or commercialisation, the business is less likely to satisfy the similar business test.
Handsley : multiple temporary residences outside of Australia insufficient to establish a permanent place of abode
In Handsley and Commissioner of Taxation (Taxation)  AATA 917, the Administrative Appeals Tribunal (Tribunal) held that the Taxpayer was an Australian resident for tax purposes, despite the Tribunal describing his connection with Australia as ‘historical’ and him spending only 50 days in Australia in relevant income year.
The Taxpayer satisfied the Administrative Appeals Tribunal (Tribunal) that he no longer ‘ordinarily resided’ in Australia. However, the Tribunal concluded that he had not adopted a domicile other than Australia and importantly,had not established a permanent place of abode outside Australia, having only intermittent stays in various countries during the year.
In this case, the Taxpayer argued that he did not reside in Australia and had either changed his domicile to a place outside of Australia or had a permanent place of abode outside of Australia on the basis that he:
- spent the vast majority of his time during the Relevant Year outside of Australia;
- had ended his married relationship with his former wife, and begun a relationship with a foreign national who did not live in Australia;
- intended to secure for himself and his new partner a permanent dwelling outside of Australia (but had not done so in the relevant income year); and
- had limited ongoing family and financial connections with Australia.
‘Ordinary residence’ in Australia
The Tribunal held that the Taxpayer was not ordinarily resident in Australia and notionally done enough to break his residence ties with Australia. The Tribunal emphasised that:
- the Taxpayer’s brief visits to Australia in the relevant year were properly described as trips to visit people rather than trips returning home;
- his residual investments in Australia were ‘relics of the past’ and not indicators of ongoing association with Australia;
- he no longer lived in Australia; and
- he had not maintained a continued and significant connection with Australia in the form of a home to come back to, cars or lifestyle assets and the like.
The Tribunal noted that despite the Taxpayer’s ‘historical’ connection with Australia, the question of domicile was different to the question of whether the Taxpayer had abandoned Australia as his residence.
In this respect, the Taxpayer had not abandoned his Australian identity and allegiance (of note was the Taxpayer’s visit to Australia in the Relevant Year to renew his passport) and could not be satisfied that he had not adopted a new domicile other than Australia.
Permanent place of abode outside of Australia
Noting the recent developments following the decision in Harding v CoT  FCAFC 291 decision (see Issue 151 of Talking Tax), the Tribunal held that while the Taxpayer did not need to maintain a single permanent physical address, it is necessary for their multiple places of temporary abode to be within one town, region or country.
In this case, the Taxpayer had intermittent stays in various countries during the year including Vietnam, Malaysia and the Philippines, the longest of which was just 45 days.
On the evidence, the Tribunal found that the Taxpayer had not established a permanent place of abode outside of Australia. The Tribunal held that where a person in transition is between places of residence, having abandoned one but not yet done enough to take up another, he or she is deemed to have retained his or her Australian domicile unless a permanent place of abode outside Australia has been established. In these circumstances, the Australian domicile will dictate residence for the purposes of the Act.
1The taxpayers, in this case, are currently seeking special leave to appeal to the High Court.
Victorian State FY20 Budget
Tim Pallas MP, Treasurer for Victoria, delivered the FY20 State budget (Budget) in Parliament on Monday, 27 May 2019 and the State Taxation Acts Amendment Bill 2019 was released the following day to implement the proposed tax changes.
Regional Victorians are the biggest winners in this Budget, while foreign investors in Victorian property and property developers were among the losers.
Our article on the key taxation measures in the Budget can be accessed here.
This article was written with the assistance of Norberto Rodriguez, Law Graduate.