Tax losses and the Proposed New "Similar Business" Test
On Friday, 21 July 2017 the Australian Taxation Office released a draft Law Comparison Guideline (LCG 2017/D6) in relation to the Business Continuity Test recently announced into the company loss rules. The amendment allows further flexibility of the company loss rules to encourage innovation and growth by incorporating a new Similar Business Test to complement the existing Same Business Test. The purpose of the Similar Business Test is to determine whether a company can utilise tax losses made from carrying on a business against income derived from carrying on a similar business following a change in ownership or control.
The Similar Business Test is comparable to the standing Same Business Test, but would remove the negative limbs which apply as part of that test. These negative limbs can constrain business development by denying access to losses merely because activities are new and of a different kind to those entered into or carried on before a change in ownership or control. Removal of the negative limbs will allow companies to engage in new business activities and transactions that evolve from their business, without losing access to their unutilised losses, encouraging innovation and growth.
The company must satisfy the similar business test to access losses. In this context, "similar" does not mean similar "kind" or "type" of business. The focus must remain on the identity of a business, as well as continuity of business activities and use of assets to generate assessable income. Accordingly, 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.
The four factors to consider in the Similar Business Test
There are four factors that must be considered when determining whether a business remains sufficiently similar. 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.
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. For the business to remain similar the assets of the business must be used to the same extent as before the change of ownership or control to generate assessable income even though they may be producing a different result or effect due to innovative changes. For example, assets closely linked to the identity of a particular business, such as goodwill, will be more relevant than other assets such as generic office premises, equipment, and stationery.
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. Where the business operator maintains the income generating activities and operations that were previously being undertaken, despite doing them in a different or more efficient way due to innovative improvements, this factor would indicate that the business remains similar to that previously carried on.
The third factor compares the current identity of the business with that of the business carried on before the change of ownership or control. 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. As these amendments are designed to encourage businesses to innovate, such changes will not, in themselves, cause a business to be considered dissimilar. Where changes to the business do not result from such innovation or development, the business is less likely to satisfy the similar business test.
The factors require a comparison between the essential characteristics of the business before and after the relevant change in ownership or control. There should not be a limit on the consideration of any other matter that may be relevant to this determination. All factors should be weighed up against each other to establish whether the business satisfies the similar business test. Where there are changes due to an innovative evolution or development of the business, the business is more likely to be similar to that previously carried on.
LCG 2017/D6 - The business continuity test - carrying on a similar business
unrealised losses in relation to CGT assets for an income year
a net capital loss for an income year, or
a debt, incurred in an income year, that the company writes off as bad
The Bill was passed by the House of Reps on 22 June 2017 without amendment and is currently before the Senate. Refer to the Australian Taxation Office website for further information in relation to the draft Law Companion Guideline LCG 2017/D6.
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