On Friday 21.7.17, the ATO released draft Law Companion Guideline LCG 2017/D6. It deals with The business continuity test – carrying on a similar business.
The draft Guideline describes how the Commissioner will apply amendments to be made by the Treasury Laws Amendment (2017 Enterprise Incentives No 1) Bill 2017. The Bill was passed by the House of Reps on 22 June 2017 without amendment and is currently before the Senate. It proposes to 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. The changes would apply with effect to income years starting on or after 1 July 2015.
The draft Guideline says the similar business test would operate in a way that is comparable to the same business test, but would remove the negative limbs which apply as part of that test. The ATO says it is still the case, however, that the overall business of a company must satisfy the similar business test to access losses.
The Draft identifies 4 factors to apply when testing whether a business is relevantly ‘similar’ for the purposes of the new s165-211 of the ITAA97.
- The first factor considers the extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time (new s165-211(2)(a)).
- 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 (new s165-211(2)(b)).
- The third factor compares the current identity of the business with that of the business carried on before the test time (new s165-211(2)(c)).
- The fourth factor requires an assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business (new s165-211(2)(d)).
COMMENTS are due by 21 August 2017.
[ATO website: LCG 2017/D6; FJM; LTN 137, 21/7/17]
Extract from ITAA 1997 – s165-210(2) – the ‘negative limbs’
165-210(2) However, the company does not satisfy the *same business test if, at any time during the *same business test period, it *derives assessable income from:
(a) a *business of a kind that it did not carry on before the *test time; or
(b) a transaction of a kind that it had not entered into in the course of its business operations before the *test time.
Extract from LCG 2017/D6
The similar business test
4. The similar business test operates in a way that is comparable to the same business test (para 1.20 of the EM), but removes the negative limbs which apply as part of that test (s165-210(2) of the ITAA97). These negative limbs can inhibit innovation and business development by denying access to losses merely because transactions or activities are new and of a different kind to those entered into or carried on before a change in ownership or control. 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.
5. It is still the case, however, that the overall business of a company must satisfy the similar business test to access losses. In this context, ‘similar’ does not mean similar ‘kind’ or ‘type’ of business. The focus remains on the identity of a business, as well as continuity of business activities and use of assets to generate assessable income. Accordingly, it will be more difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time. In contrast, where a company develops a new product or function from the business activities already carried on, and this development opens up a new business opportunity or allows the company to fill an existing gap in the market, the business as a whole is likely to satisfy the similar business test.
6. The four factors that must be taken into account, in determining whether a business remains sufficiently similar, require a comparison between the essential characteristics of the business before and after the relevant change in ownership or control. These four factors do not limit consideration of any other matter that may be relevant to this determination and all factors are weighed up against each other to establish whether the business satisfies the similar business test.
7. The first factor considers the extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time (new s165-211(2)(a)). Where the assets of the business are being used to the same extent as at the test time to generate assessable income, albeit that they may be producing a different result or effect due to innovative changes, this factor would indicate that the business remains similar to that previously carried on. The continuing use of certain business assets to generate assessable income rather than others may be more relevant to the question of whether the similar business test is passed. For example, assets closely linked to the identity of a particular business, such as goodwill, will be more relevant than other assets such as generic office premises, equipment, and stationery.
8. 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 (new s165-211(2)(b)). Where the business operator maintains the income generating activities and operations that were previously being undertaken, despite doing them in a different or more efficient way due to innovative improvements, this factor would indicate that the business remains similar to that previously carried on.
9. The third factor compares the current identity of the business with that of the business carried on before the test time (new s165-211(2)(c)). Where new activities have not resulted in the identity of the business changing, then this factor would indicate that the business remains relevantly similar to that previously carried on.
10. The fourth factor requires an assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business (new s165-211(2)(d)). As these amendments are designed to encourage businesses to innovate, such changes will not, in themselves, cause a business to be considered dissimilar. Where changes to the business do not result from such innovation or development, the business is less likely to satisfy the similar business test.
11. The first three factors are concerned with the aspects of the business that have continued, while the fourth factor assesses the nature of any changes that have happened. Where those changes are due to an innovative evolution or development of the business, the business is more likely to be similar to that previously carried on.