New similar business test for losses | KPMG | GLOBAL

New similar business test for losses

New similar business test for losses

Jenny Wong discusses the proposed legislation to relax the loss recoupment rules by introducing a more flexible "similar business test."

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On 30 March 2017, legislation was introduced into Parliament proposing to relax the loss recoupment rules by introducing a more flexible "similar business test." Businesses that have changed ownership and fail the continuity of ownership test (COT) can now access past year tax losses or bad debt write-offs by meeting either the "same business test" or the new "similar business test" (collectively the "business continuity test").

The new rules are proposed to apply to losses or bad debts incurred in an income year starting 1 July 2015 subject to specific integrity rules. Although announced as part of the National Innovation and Science Agenda on 5 December 2015, the rules apply widely to businesses, not only start-ups. 

There are four indicia you need to take into account in working out whether a "similar business" is carried on. There were only three in the previous Exposure Draft and the fourth one has been added in the final Bill.

  • The extent to which assets (including goodwill) that are used in the current business to generate assessable income throughout the business continuity test period were also used in its former business to generate assessable income.
  • The extent to which activities and operations from which the current business generates assessable income throughout the business continuity test period were also activities and operations from which its former business generated assessable income.
  • The identity of the current business and the identity of the former business. 
  • The extent to which any changes to the former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business.

Carried forward losses or bad debts incurred before 1 July 2015 must rely on same business test. If incurred after 1 July 2015, the taxpayer has a choice to apply either the new similar business test or the same business test.

Losses or bad debts transferred to a tax consolidated group after 1 July 2015 cannot rely on the new rule if originally incurred by the joining entity before that date. The integrity rules in Division 175, which prevent tax avoidance schemes or income injection schemes from accessing a company’s tax losses or deductions, will still apply where the company satisfies the similar business test.

Relaxing the loss recoupment rule is a welcoming change to encourage not only start up businesses but also business generally to innovate and grow. It is a question of degree and fact as to how similar is "similar." Further ATO guidance and revisiting existing tax rulings on the same business test may be needed. 

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