From 1 July 2015 the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 which passed both houses on the 22 June 2017, has changed the small business test to a more flexible similar business test. This Business Continuity Test allows access to prior year losses for companies (and certain trusts) when those entities fail the Continuity of Ownership test. These changes were introduced to allow businesses slightly more flexibility to innovate and grow without losing prior year losses.
The same business test/similar business test is required to be satisfied when a company fails the continuity of ownership test. A company will fail the continuity of ownership test when there have been changes to the ownership or control of the company/certain trusts that results in more than 50% not being held by the same natural persons at the beginning of the loss year and ending at the end of the year when the company wants to use the loss (called the income year).
Broadly a company could satisfy the same business test if all of the following requirements were met:
- The company carried on the same business in the income year that it wanted to use the loss as it also carried on immediately before the time the continuity of ownership test was failed.
- The company must not have produced assessable income from a kind of business it didn’t carry on before the test time
- The company must not have produced assessable income from a type of transaction that it had not conducted previously in the course of business before the test time.
The last two points were the requirements that may have discouraged businesses to innovate or adapt their businesses.
Under the new rules the aspects of the business that are necessary to consider when taking into account whether the business before the test time is similar to the current business are the following non-exhaustive list of factors:
- The extent to which the assets (including goodwill) that are used in the current business to produce assessable income were used in the former business to produce assessable income. The assets include physical as well as intangible such as trademarks, patents and royalty agreements.
- The extent to which the activities and operations from the current business produced assessable income was also the activities and operations that the former business used to produce assessable income. An example of new operation and activities from the explanatory memorandum is a company running an Italian restaurant then opening up a new take away and fish and chip shop. It is not enough that they are both operations are in the hospitality industry.
- The identity of the current business and the identity of the former business. This could include factors such as mere branding and public recognition.
- The extent to which any changes to the former business resulted from the development or commercialisation of assets, products, processes, services, or marketing or organisational methods, of the former business. Changes made from the former business to the current business activities and operations must result from the natural organic development of the business.
The Business Continuity Test applies to the following:
- Eligibility to apply prior year tax loss for an income year starting on or after 1 July 2015;
- Calculating taxable income for an income year starting on or after 1 July 2015;
- Eligibility to apply prior year capital loss for an income year starting on or after 1 July 2015;
- Deductions for a debt that the company writes of as bad, when incurred in an income year starting on or after 1 July 2015.
So while the Business Continuity Test allows some flexibility you should still seek advice before making the assumption that prior year losses can be utilised in a company (or certain trusts) that has changed ownership between the year the loss was made and the year in which the company wishes to apply the loss.
Legislation & Explanatory Memorandum:
http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5850
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