A company that fails the continuous ownership and control test may still carry forward its loss for deduction in subsequent years if it can satisfy the new business continuity test introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 2019. The new business continuity test maintains the prior same business test and introduces a new similar business test for the purpose of utilizing tax losses incurred for income years beginning on or after 1 July 2015 following a change in ownership or control.
Thus, if there is a change of at least 50% in the ownership or control of a company, the company needs to satisfy:
- The same business test; or
- The similar business test, which applies to losses incurred in an income year beginning on or after 1 July 2015.
The same business test requires all of the following three conditions to be met throughout the prospective loss recoupment year:
- The company must carry on essentially the same overall business as the one it carried on immediately before the test time;
- It must not derive taxable income from a new business (i.e. a type of business it did not carry on before the test time); and
- The company must not derive taxable income from a new transaction (i.e. a transaction that is of a kind different from those transactions the company entered into before the test time).
The similar business test is satisfied if a company carries on a similar business to the one it carried on immediately before the change of ownership or control. The following four main factors must be considered in determining whether the current business is similar to the former business:
- The extent to which the assets used to generate assessable income throughout the business continuity test period are the same assets used in the business carried on before the test time, even if the assets may be producing a different result or effect due to the development or commercialization of some of those assets;
- The extent to which the current activities and operations from which assessable income is generated are also those from which assessable income was generated previously;
- The identity of the current business and the identity of the business carried on before the test time; and
- The extent to which the changes to the business resulted from the development or commercialization of assets, products, processes, services, or marketing or organizational methods of the business.
The first three factors are related to business continuity, whereas the fourth factor assesses the nature of any changes that have happened. The focus is on the identity of a business, as well as the continuity of business activities and the use of assets to generate assessable income.
A company that has not maintained the same majority ownership will not be able to use its carried-forward tax losses if it has closed its business completely (e.g. discontinued the business previously carried on and has no intention to resume). This is because it will fail the same business test and similar business test.
However, if a company is still carrying on its business, it will not fail the same business test or similar business test merely because it has:
- Reduced the scale of its business, including circumstances where its activities have reduced to a minimum or are almost entirely suspended; or
- Suspended or temporarily closed its business only because of temporary adversity or due to reasons beyond its control which it intends to overcome.
Whether a company is still carrying on the business can be determined based on the reasons for the inactivity or whether there is the expectation of resuming active operations within a reasonable time.
Thus, if a company's business has been affected by circumstances relating to COVID-19 after its majority ownership has changed, the above principles should be taken into account in determining whether the business continuity test is fulfilled.