Recent changes in the tax law will improve the ability of companies to obtain a tax deduction for losses incurred in previous income years to be deducted in future years.
For decades, companies have been required to pass a continuity of ownership test or a same business test to enable losses to be deducted against future assessable income. These tests were introduced into the tax law to prevent the trading in company losses; this usually occurred when companies loaded with carry forward losses were sold on the open market.
These changes allow companies to carry forward their tax losses to future income years following the changes in their ownership and control. The same business test has been simplified to make the passing of the test for companies easier.
A company can deduct their tax losses if the company’s majority of owners did not change from the year of the loss to the year that the loss deduction is claimed; this is called the continuity of ownership test. Previously, when the change in the company’s majority ownership occurs, the company had to pass the same business test.
Generally, the same business test is passed if the ‘loss company’ and the ‘claiming company’ are the same company. A company cannot satisfy the same business test if:
- the company, at any time during the business continuity test period, derived assessable income from a business of a kind which the company did not carry on before the test time; or
- the company, at any time during the business continuity test period, derived assessable income from a transaction of a kind that the company had not entered into in the course of its business operations before the test time.
The test time is usually the time when the change in majority ownership of the company occurred causing the same business test to apply.
Under the new law, the previous ‘same business test’ is retained and a new, alternative ‘similar business test’ has been introduced. The similar business test operates in a way that is comparable to the same business test but removes the above mentioned two requirements. This change should allow companies to engage in new business activities and transactions that develop from their business, without losing access to their un-utilised tax losses. Therefore, introducing the similar business test should encourage smaller companies to be more innovative.
A business will remain similar if the following four factors are considered and satisfied when comparing the business before and after the relevant change in ownership or control in the company:
- the extent to which the assets (including goodwill) that are used in the current business to generate assessable income are also used in the company’s former business to generate assessable income;
- the extent to which the activities and operations from which the current business generates assessable income are also the activities and operations from which the former business generated assessable income;
- the identity of the current business and the identity of the former business; and
- 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.
Please note that these four factors do not limit consideration of any other matter that may be relevant to the determination whether a business remains sufficiently similar. The Australian Taxation Office (ATO) weighs each factor depending on the facts and circumstances of each case.
The law introducing similar business test, applies retrospectively to the tax losses, unrealised losses in relation to CGT assets, net capital losses and bad debts incurred by companies and widely held trusts on or after 1 July 2015.