On 6 April 2016, Treasury released a draft of the Tax and Superannuation Laws Amendment (2016 National Innovation and Science Agenda) Bill 2016, which was to further the ‘National Innovation and Science Agenda’ by making it easier for companies to carry forward their tax losses and capital losses by adding a ‘similar’ business test to the ‘same’ business test – both of which are to be subsumed in a ‘business continuity test’ (with cognate changes elsewhere).

I have extracted key portions of the draft Bill and draft Explanatory Memorandum (EM) for a more detailed record of the changes.

[Draft Bill] [Draft EM] [Related Tax Month article]

 

Extract from the Draft Bill

165-211 The business continuity test—carrying on a similar business

(1)    A company also satisfies the business continuity test in relation to:

(a)  a *tax loss for an income year starting on or after 1 July 2015; or

(b)  taxable income for an income year starting on or after 1 July 2015; or

(c)  a *net capital gain or *net capital loss for an income year starting on or after 1 July 2015; or

(d)  a *trading stock loss for an income year starting on or after 1 July 2015; or

(e)  a debt, incurred in an income year starting on or after 1 July 2015, that the company writes off as bad;

if throughout the *business continuity test period it carries on a business (its current business) that is similar to the *business it carried on immediately before the *test time (its former business).

(2)   Without limiting the matters that may be taken into account in ascertaining whether the company’s current business is similar to its former business, the following must be taken into account:

(a)   the extent to which the assets (including goodwill) that are used in its current business to generate assessable income throughout the *business continuity test period were also used in its former business to generate assessable income;

(b)   the extent to which the sources from which its current business generated assessable income throughout the business continuity test period were also the sources from which its former business generated assessable income;

(c)   whether any changes to its former business are changes that would reasonably be expected to have been made to a similarly placed business.

(3)    However, the company does not satisfy the *business continuity test under this section if, before the *test time, it:

(a)  started to carry on a *business it had not previously carried on; or

(b)  in the course of its business operations, entered into a transaction of a kind that it had not previously entered into;

and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the *business continuity test period a business that is similar to the business it carried on immediately before the test time.

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Extract from the Draft Explanatory Memorandum

Outline of chapter

1.1 This Exposure Draft Bill contains proposed amendments to the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to supplement the same business test with a more flexible similar business test to improve access to losses for companies that have changed ownership. Under the proposed amendments those companies will be able to deduct losses if they satisfy the similar business test, which is framed to allow companies to seek out opportunities to innovate and grow without losing access to losses.

Context of amendments

1.2 Where a taxpayer has more deductions for an income year than they have assessable and exempt income, the difference is a tax loss (section 36-1 of the ITAA 1997).

1.3 A tax loss for an income year (the loss year) can be carried forward and deducted from assessable income in future income years. However, a company must pass either:

  • the continuity of ownership test, which is failed if the company has undergone a substantial change in ownership or control; or
  • the same business test, which is failed unless the company carries on the same business and has not derived income from new kinds of transactions or new kinds of business.The continuity of ownership test

1.4 A company fails the continuity of ownership test if it undergoes a substantial change in ownership or control within the period from the start of the loss year to the end of the income year in which it seeks to utilise a prior year loss.

1.5 There is a modified continuity of ownership test for widely-held and other eligible companies (Division 166 of the ITAA 1997).

 

1.6 To pass the same business test, a company must carry on the same business throughout the ‘same business test period’ that it carried on immediately before the ‘test time’.

1.7 Generally, a company satisfies the same business test if it carries on the same business in the income year in which it seeks to recoup losses (the ‘same business test period’) as it carried on immediately before the change of ownership or control that caused it to fail the continuity of ownership test (the ‘test time’) (see subsection 165-13(2) of the ITAA 1997).

1.8 Additionally, a company will not satisfy the same business test if either of the negative limbs of the same business test is met. The negative limbs look at the component undertakings and transactions of the company and are met if, throughout the same business test period, the company:

  • derives assessable income from a kind of business that it did not carry on before the test time (new business test, paragraph 165-210(2)(a) of the ITAA 1997); or
  • derives assessable income from a transaction of a kind that it had not previously entered into in the course of its business before the test time (new transaction test, paragraph 165-210(2)(b) of the ITAA 1997).

1.9 On 7 December 2015, the Government announced a package of measures designed to incentivise and reward innovation as part of its National Innovation and Science Agenda. One of those measures is to supplement the same business test with a more flexible similar business test. This is because, by threatening access to past year losses, the same business test may deter companies from seeking out new business opportunities. These changes encourage entrepreneurship by allowing loss-making companies to seek out new opportunities to return to profitability.

The relevance of the same business test

1.10 The same business test is not only used for working out whether tax losses from previous income years can be utilised. The same business test is also used to work out the following:

  • whether a company can apply a net capital loss from a previous year, incurred prior to a change of ownership or control against current year capital gains (see Subdivision 165-CA of the ITAA 1997);
  • whether certain companies can use losses, including trading stock losses, in respect of CGT events that happen to CGT assets that it acquired prior to a change of ownership or control (Subdivision 165-CC of the ITAA 1997);
  • whether a company can deduct a debt written off as bad in an income year, where the debt was initially incurred prior to a change of ownership or control (see Subdivision 165-C of the ITAA 1997);
  • whether and how the special methods for working out a company’s taxable income and loss, and net capital gain and loss for the income year in which the company has undergone a change of ownership or control apply (see Subdivisions 165-B and 165-CB of the ITAA 1997); and
  • whether a company joining a consolidated group can transfer its losses to the head company (see Division 707 of the ITAA 1997).

1.11 There is also a parallel same business test with respect to listed widely-held trusts (Subdivision 269-F in Schedule 2F to the ITAA 1936). This parallel same business test is relevant to working out:

  • whether the trust can utilise losses from years preceding a change of ownership or abnormal trading in the units of the trust (Subdivision 266-D in Schedule 2F to the ITAA 1936);
  • whether the trust can deduct a debt written off as bad, where the debt was incurred in years preceding a change of ownership or abnormal trading in the units of the trust (Subdivision 266-D in Schedule 2F to the ITAA 1936); and

whether the special way for working out the trust’s net income and tax loss in an income year in Division 268 of Schedule 2F to the ITAA 1936 applies, as a consequence of an abnormal trading that results in a change of ownership.

Time periods for which the same business test must be satisfied

1.12 A company satisfies the same business test if it carries on the same business throughout the ‘same business test period’ as it carried on immediately before the ‘test time’.

1.13 The ‘same business test period’ and ‘test time’ vary depending on the purpose for which the same business test is applied.

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