Legislation was introduced into parliament proposing to relax the loss recoupment rules by introducing a more flexible Similar Business Test from 2017. 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, which are collectively called the Business Continuity Test.
Under this new test, a company will be able to utilise tax losses and bad debts incurred in the 2015-16 or a later income year made from carrying on a business against income derived from carrying on similar business following a disqualifying change in ownership or control.
How does the Similar Business Test operate?
The Similar Business Test operates in a way that is comparable to the Same Business Test, but removes the negative limbs which apply as part of that test. Removal of the negative limbs will allow companies to engage in new business activities and transactions that evolve from their business without losing access to their unutilised losses, encouraging innovation and growth.
The term ‘similar’ does not mean similar ‘kind’ or ‘type’ of business but rather, the identity of the business and the assets used in the derivation of assessable income in the former business, are the same as in the current business. There are four factors that must be taken into consideration when determining whether a business remains sufficiently similar. This requires a comparison between the essential characteristics of the business before and after the relevant change in ownership or control. These factors are:
The first factor considers 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.
- Activities and operations
The second factor compares the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously.
The third factor compares the current identity of the business with that of the business carried on before the test time.
The fourth factor requires an assessment of 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.
If you have any questions in relation to the above, please do not hesitate to contact our accountants at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.