Access to tax losses: How similar is your business? | KPMG | GLOBAL

Access to tax losses: How similar is your business?

Access to tax losses: How similar is your business?

Jenny Wong discusses a new Law Companion Guide released by ATO in regards to similar business test.

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The Australian Taxation Office (ATO) published Law Companion Guide LCG 2017/D6 on 21 July 2017, setting out how the Commissioner will apply the new similar business test in accessing tax losses, bad debt deductions and net capital losses. The similar business test, first announced in 2015 when the Government announced a package of innovation measures, supplements the same business test and is designed to encourage entrepreneurship, and seeking out opportunities to innovate and grow without losing access to losses. Broadly, it applies to losses incurred in income years beginning on or after 1 July 2015.

This new test is contained in Treasury Laws Amendment (2017 Enterprise Incentive No.1) Bill 2017, which has not yet received Royal Assent. When the amendments become law, the LCG 2017/D6 will be finalised and become a public ruling. The similar business test operates in a way that is comparable to the same business test but removes the negative limbs which can deny tax losses merely because transactions or activities are new or a different kind to those entered into or carried on before a change in ownership or control.

As with the same business test, the focus of the similar business test is on the identity of the business. LCG 2017/D6 provides it is not sufficient for the current business to be of a similar ‘kind’ or ‘type’ to the former business. For example, it is not enough to say that the former business was in the hospitality industry and the current business is in the hospitality industry. 

LCG 2017/D6 also provides 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 LCG analyses the four factors that must be taken into account when determining whether a business remains sufficiently similar. The four factors are:

  • 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 extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated.
  • A comparison of the current identity of the business with that of the business carried on before the test time.
  • The extent to which the changes of the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business. 

The LCG applies these factors to five examples. The first two examples demonstrates the different conclusions reached on the similar business test depending on whether the business has undertaken innovation or development or not and the business that has generated new assessable income from innovation is more likely to satisfy the similar business test. In the third example, a business that moves to sales from bricks and mortar to an online shop is also likely to satisfy the same business test. The fourth example discusses how the similar business test is failed when a company undergoes a rebranding. The fifth example discusses a mining company that uses the same key assets to produce other precious metals for sale but is ‘insignificant’.

It would seem applying the similar business test, whilst it is meant to relax the operation of the same business test to access losses, would still require some consideration of when the line will be drawn between passing or failing the similar business test. 

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