Accessing Company Tax Losses …
will hopefully become a little easier thanks to Treasury Laws Amendment (2017 Enterprise Incentives No.1) Bill 2017 (“the Bill”)!
The Bill provides a new, supplementary test, which may allow a Company to utilise its carried forward tax losses where it may not have been able to do so in the past (because of a substantial change in ownership or control).
In response to the Bill, the Australian Taxation Office (“ATO”) have also recently released Draft Law Companion Guideline LCG 2017/D6 (“the Draft Guideline”).
The Draft Guideline provides guidance (naturally) on how the Commissioner will apply the amendments made by the Bill including the new test. If the Bill is enacted without amendment, as is hoped, the Guideline will be finalised and become a Public Ruling.
Accessing Company Tax Losses under the new “Business Continuity Test”
The Bill introduces a new “Business Continuity Test”. The test has two elements, actually two tests within a test. It retains the existing “same business test” AND introduces a new ‘similar business test!
Under the new rules, a Company will be able to utilise carried forward tax losses against income derived from carrying on a similar business as was operated prior to a change in ownership or control. The similar business requirement provides scope for innovation and flexibility relative to the traditional same business requirement.
So what constitutes a “similar business”?
The ATO’s Draft Guideline indicates that it will be more difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time.
In contrast, where a company develops a new product or function from the business activities already carried on, and this development opens up a new business opportunity or allows the company to fill an existing gap in the market, the business as a whole is likely to satisfy the similar business test.
The Draft Guideline provides four factors that must be taken into account, in determining whether a business remains sufficiently similar, require a comparison between the essential characteristics of the business before and after the relevant change in ownership or control.
These four factors do not limit consideration of any other matter that may be relevant to this determination and all factors are weighed up against each other to establish whether the business satisfies the similar business test.
Four Factors to a Similar Business
- The first factor considers the extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time.
- The second factor compares the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously.
- The third factor compares the current identity of the business with that of the business carried on before the test time. Where new activities have not resulted in the identity of the business changing, then this factor would indicate that the business remains relevantly similar to that previously carried on.
- The fourth factor requires an assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business.
The first three factors are concerned with the aspects of the business that have continued, while the fourth factor assesses the nature of any changes that have happened. Where those changes are due to an innovative evolution or development of the business, the business is more likely to be similar to that previously carried on.
The Draft Guideline includes various examples to demonstrate the approach the ATO will take in assessing whether a Company satisfies the similar business test to highlight the four legislative factors that are to be taken into account.
This new “similar business” test will apply for income years starting on or after 1 July 2015.
Need help accessing company tax losses, please get in touch.