The Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017 has finally been passed. The tax law changes under this Bill, which was originally introduced on 30 March 2017, will supplement the “same business test” with a “similar business test” for the purposes of working out whether a company’s tax losses and net capital losses from previous income years can be used as a tax deduction in a current income year.
As with the same business test, the business continuity test applies to the deductibility of tax losses, capital losses and bad debts. It also is relevant to whether a company joining a consolidated group can transfer its losses to the head company of the consolidated group.
Like the same business test, the focus of the similar business test is on the identity of the business. 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 also in the hospitality industry. Instead, the test looks at all of the commercial operations and activities of the former business and compares them with all of the commercial operations and activities of the current business to work out if the businesses are “similar”.
As with the same business test, whether the current business is similar to the former business is a question of fact. The following four factors must be taken into account when considering the businesses’ similarity:
- Same assets used to generate income – the extent to which the assets (including goodwill) used in the current business to generate assessable income were also used in the company’s former business to generate assessable income.
- Assessable income from same activities – the extent to which the activities and operations that generate the current business’s assessable income were also the activities and operations that generated the former business’s assessable income.
- Identity of the business – a close comparison between the identities of the former and the current business.
- Development of former business – the extent to which any changes to the current business result from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business.
The changes will apply to income years starting on or after 1 July 2015. The proposal was previously announced on 7 December 2015 as part of the government’s National Innovation and Science Agenda.