The government plans to give companies greater access to prior year tax losses in a bid to stimulate business innovation. A new alternative to the “same business test” – the “similar business test” – will make it easier for companies that have experienced a significant change in ownership or control to carry forward their losses. While this will provide greater flexibility, companies will need to carefully weigh up a range of factors to determine whether they meet the test.
Under the current law, a company that has experienced a significant change in ownership or control may only carry forward its tax losses to a later income year if the company meets the “same business test”. This test broadly requires that the company currently carries on the same business as it did before the change of ownership or control, and that it does not derive any income from a new kind of business or a new kind of transaction that it previously did not enter into. These rules are designed to prevent “loss trading” (ie selling tax losses by selling a loss company to new owners).
Recognising that these rules may be too strict and discourage some companies from legitimately innovating or adapting their businesses to meet changing economic circumstances, the government now proposes to introduce an alternative “similar business test” to make it easier to access prior losses. Under the proposed new rules, a company that has experienced a significant change in ownership or control will be able to carry forward its losses if it meets either the existing “same business test” or the new “similar business test”.
The word “similar” is not defined in the proposed new rules, and whether a company carries on a “similar” business will be a question of fact. There is no limit on the factors that may be taken into account when determining this. However, factors that must be taken into account include: the extent to which the assets used in the current business were previously used in the former business; the extent to which the operations of the current business match those of the former business; and the “identity” of the current business compared to the former business.
Utilising prior year losses is an important tax planning issue for many businesses. Contact us for advice on the company tax loss rules and whether your business activities are likely to pass the new “similar business test”.