Companies can carry forward tax losses and deduct them against income derived in later years, subject to satisfying certain rules that are designed to prevent trafficking in losses. These rules primarily allow a company to claim deductions for prior year revenue tax losses where it passes the ‘continuity of ownership test’.
The ‘continuity of ownership test’ (COT) is met if the same persons beneficially own shares that carry the right to more than 50% of the voting power, and rights to dividends and capital distributions at all times during the period from the start of the loss year to the end of the income year in which the loss is to be deducted.
Where a company fails the COT, traditionally, it would need to satisfy the ‘same business test’ so it could continue to claim any relevant tax losses or bad debt deductions.
Unfortunately, the ‘same business test’ was (and continues to be) notoriously difficult to pass. It has also been heavily criticised as inhibiting innovation and business development. This is primarily because its application often discourages new activities (or transactions) occurring after a change in majority ownership, despite the fact that such activities or transactions may assist in improving the viability and profitability of a company’s underlying business.
Recent amendments, contained in the Treasury Laws Amendment (2017 Enterprise Incentives No.1) Bill 2017 (‘TLAB1’), which passed both houses of Parliament on 12 February 2019, introduce measures to supplement the existing ‘same business test’ with a new and more flexible ‘similar business test’, under what will be collectively known as the ‘business continuity test’. These amendments apply to income years starting on or after 1 July 2015.
For more information on company loss rules, particularly how the new ‘similar business test’ may affect you, contact The Quinn Group on 02 9223 9166 or submit an online enquiry.