Corporate entities are afforded a lot of tax benefits and flexibility in the way that they manage their tax affairs, particularly in their treatment of available tax losses. One such benefit is the ability to carry forward losses accumulated in one income year for deduction against assessable income gained in future years. The general limitation is that the company that incurred the loss must be one and the same entity as the claiming company so in order to utilise a prior year loss, a company must satisfy either the Continuity of Ownership Test or the Same Business Test.
What do these Tests mean for you?
It should be noted that both these test have undergone significant legislative change in the last 10 years such that the current tests have become far more stringent and restrictive. Companies seeking to satisfy the requirements of either test, need to be cautious in ensuring their continued compliance from the start of the income year in which the loss was incurred, to the end of the income year in which the loss is to be deducted (“ownership test period”). Failure to satisfy either test will result in the prior year losses being lost.
To satisfy the Continuity of Ownership test, a company must demonstrate that any shares carrying:
1. the right to exercise more than 50% of voting power in the company;
2. the right to receive more than 50% dividends and
3. the right to receive more than 50% distribution of capital
are beneficially owned by the same person or persons during the ownership test period.
Since 21 September 1999, the person must own the same interests in the same shares throughout the ownership test period to satisfy the above test.
If the company is unable to satisfy the Continuity of Ownership Test, prior year losses can still be utilised if the company is able to satisfy the Same Business Test. In essence, the company must carry on the same business in the year it seeks to claim prior year losses, as it carried on immediately before the “test time”.
To satisfy the Same Business Test, the company must not derive assessable income during the Same Business Test period from:
1. a business of a kind that it did not carry on before the test time (“New Business Test”); or
2. a transaction of a kind that it had not entered into in the course of its business operations before the test time (“New Transactions Test”).
This makes the dates on which any changes in the company’s business, or the company’s ownership, critical to the assessment of the test. The concept of “same” has been considered by the Commissioner and does not strictly equate to a business’ operations being identical. The natural growth or discontinuation of certain aspects of a business’ operations are allowable provided no sudden or dramatic change in the business’ activities have been undertaken on a considerable scale.
These tests are further subject to numerous anti-avoidance measures specifically enacted to disallow the illegitimate exploitation of these company tax benefits. As this area of tax is becoming increasingly complex, it is important to seek professional advice in regards to whether your company is entitled to carry forward its losses and how to best utilise them against your company’s future assessable income.
Here at The Quinn Group our experienced team of accountants and tax agents can assist you in determining whether your company meets the requirements of either test enabling your prior year losses to be retained. For more information about prior year losses, the Continuity of Ownership or Same Business tests or for any other tax advice submit an online enquiry or call us on 1300 QUINNS (784 667) or on +61 2 9223 9166 to book an appointment.