Changes to Company Loss Rules - The Similar Business Test
In February 2019, the Federal Government enacted changes to the company loss rules, which were first announced in 2015. The Similar Business Test has been introduced to address limitations to the existing Same Business Test, which may have discouraged certain companies from innovating or adapting their businesses to changing economic circumstances.
Existing Company Loss Rules
A tax loss for an income year (loss year) can be carried forward and deducted against assessable income in future income years if the company passes either:
• The Continuity of Ownership Test, which is failed if the company has undergone a change of more than 50% in ownership or control; or
• The Same Business Test.
Issues with the Same Business Test
The Same Business Test is satisfied if a company carries on the same (but not identical) business from the time the Continuity of Ownership is failed (test time) until the time the prior year loss is utilised. However, the Same Business Test is failed it a company derives assessable income from a business of a kind it did not carry on or from a transaction of a kind that it had not entered into in the course of its business operations before the test time.
The Same Business Test discourages companies from seeking new investors or explore new profit-making activities as it may deem the company as having entered into a new type of transaction or business activity. This will prevent the company from utilising carried forward losses as it would fail the Same Business Test. This may leave the company being locked into an inefficient business model.
The Similar Business Test
The Similar Business Test does not replace the Same Business Test but supplements it. Both tests will be collectively referred to as ‘business continuity test.’ For a company to pass the Similar Business Test, a company can carry forward and utilise its prior year losses if it carries on a business that is ‘similar’ to the business it carried on before the Continuity of Ownership Test is failed.
To determine whether a business is ‘similar’ to the former business, there must be an element of continuity of the businesses’ identity or operations. All four following factors must be considered in making this determination:
• The extent to which the assets (including goodwill) that are used in the current business to generate assessable income were also in the company’s former business to generate income;
• The extent to which the activities and operations from which the company’s current business generated assessable income throughout the business continuity test period were also the activities and operations from which the former business generated assessable income;
• A comparison between the identity of the former business and the current business;
• Consideration of the degree of connection and continuity between the former business and the current business to the extent to which any changes to its former business results from the development or commercialisation of assets, products, processes, services, or marketing or organisational methods of the former business.
The Similar Business Test applies to tax losses and capital losses incurred by companies for income years starting on or after 1 July 2015. It will also apply when determining the availability of bad debt deductions for debts incurred for income years starting on or after 1 July 2015.
If you have questions on any of the above, or other matters relating to your tax or financial affairs, please do not hesitate to contact our office on (07) 5504 5700 to speak to one of our trusted advisors.