• Increasing access to tax losses

The Government’s National Innovation and Science Agenda was launched on 7 December 2015. Designed to stimulate business innovation in Australia, it included a number of proposed tax reforms.

Recently we shared with you the changes to the depreciation regime for intangible assets. The latest reform relates to increasing access to historical company tax losses. Targeted at encouraging entrepreneurship, the reform allows loss-making companies to seek out new opportunities to return to profitability.

Current tax loss rules

Where companies experience changes to their majority ownership they can currently only use prior-year tax losses if they pass the ‘same business’ test. To do this, broadly speaking, a company must carry on the same business as it did when the continuity of ownership test was failed, and then throughout the entire income year that the losses will be utilised. Being a subjective test where no two test cases are ever the same, this is a difficult test to pass; particularly as the passage of time extends from when the continuity of ownership test is failed. Further, if a company’s business has changed in any significant way since the losses were made, it will be denied the losses, which tends to discourage innovative or loss-making businesses from seeking out new opportunities.

Proposed new tax loss rules

From 1 July 2015, the same business test will be supplemented by a more flexible ‘similar business’ test, and will allow loss-making companies where ownership has changed to use prior-year losses even where business operations have changed. The new rules are designed to allow loss-making companies to respond to commercial imperatives without losing valuable tax losses which could be used to stimulate growth.  

In assessing whether the business conducted throughout the business continuity test period (the ‘current business’) is similar to the business conducted immediately before the failure of the continuity of ownership test (the ‘former business’), regard must be had to three factors (the list is not exhaustive):

  • the extent to which the assets (including goodwill) used in the current business to generate assessable income were also used in the company’s former business to generate assessable income;
  • the extent to which the sources from which the current business generates assessable income were also the sources from which the former business generated assessable income; and
  • whether any changes to the former business are changes that would reasonably be expected to have been made to a similarly placed business.

Providing the changes to the business are not significant and the identity of the business has remained sufficiently similar since the losses were made, the company should not lose access to its carry-forward tax losses.

The new ‘similar business’ test should apply to all loss-making companies and some widely held trusts that have undergone a change in majority ownership. It could also be particularly valuable to start-up ventures or loss-making businesses looking to derive profit through innovation.

Application date

The change will apply from 1 July 2015 onwards, which means that the old ‘same business’ test will continue to apply to any tax losses incurred before 1 July 2015.

Grant Thornton’s view

We welcome any changes to the law that encourage growth. While not sweeping, the tax loss rule changes are a small step in the right direction, making it easier for innovative new ventures and struggling businesses alike to move into profit.

A note of caution: The way in which the similar business test has been drafted contains some ambiguity and will need to be applied judiciously. Companies potentially in a position to benefit from the new rules should seek advice on how they apply to their particular situation.