Earlier this year, the ‘similar business test’ was introduced with the passing of Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 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 amendments apply to income years starting on or after 1 July 2015.
The new ‘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. Moving forward, all that will be required is sufficient similarity in the business being carried on, determined by applying four factors listed in the legislation, and any other relevant circumstances.
The four factors, which are not exhaustive, include the extent to which the assets used to generate income were also used formerly; the extent to which the activities and operations were also the same with the previous business; the identity of the current business and the identity of the former business; and 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.
Speaking to Accountants Daily, HLB Mann Judd partner Peter Bembrick said the new test was a positive change, given its wider and more flexible approach.
“As with most such changes, there is an element of complexity in that tax losses incurred in the 30 June 2015 and prior years would still require the old same business test to be satisfied, so many companies could well have some losses that are forfeited where changes in the company’s activities cause a breach of same business test while losses from later income years are still available because they fall within the new similar business test,” said Mr Bembrick.
“This should become less of an issue as time goes on and companies become less likely to have unused tax losses from these earlier years.”
Mr Bembrick said tax advisers should also consider the examples in LCR 2019/1 that demonstrate how different each outcome may be in relation to the circumstance of the business.
In example 4 in the ruling, a fast food restaurant with a distinctive name, logo and identity with declining profitability had a majority change in ownership and then underwent a complete rebranding to be transformed into a restaurant focusing on premium, high-quality, healthy meals with a more contemporary restaurant layout.
The ATO’s view is that while the company is still operating a restaurant in the same premises and even uses some of the same suppliers, it is no longer making use of any of the goodwill of the previous business, has had a significant change in image, branding, layout, marketing strategy that did not result from any commercialisation or innovation of the existing business, but was initiated afresh in an effort to create a new profitable business activity for the company. The tax losses from previous years would no longer be available.
On the other hand, example 3 involves a clothing retailing carrying its own line of casual wear that is considered to satisfy the similar business test despite major changes to the way the business is operated after the company is sold to a new owner, including transitioning over a period of time to selling purely online after significantly redeveloping and updating its website, introducing delivery and parcel pick-up arrangements, updating its marketing strategy and changing its warehousing arrangements.
Unlike Example 4, the ATO accepts that this company has retained much of the core goodwill from the original business, and regards the changes as more in the nature of innovation and evolution of the existing business, especially through embracing greater and more effective use of technology and better meeting the needs of its customers, and therefore the company is able to keep its tax losses.
“These examples show that, while there can be a fine line and the situation will not always be clear-cut, whenever there is a significant change of ownership of a company and tax losses exist from prior years, any proposed changes to the business activities should be measured against the examples set out in the ATO ruling to consider whether the similar business test is likely to be satisfied,” said Mr Bembrick.
“This will be equally true for tax losses incurred in the 2015 and prior years, except that the more onerous SBT will need to considered.”