Changes to the “same business test”
What is ‘the same business’ test?
One of the first tax legislation items the government dealt with in the new year was a bill that contained changes to the “same business” test.
The same business test is relevant in a number of contexts, particularly in determining if a company is eligible to claim deductions for past year losses, current year losses and bad debts, and to determine if the existence of unrealised losses may affect future deductions and offsets that may be otherwise available.
The need to satisfy the same business test however generally arises if there has been a change in the business’s ownership or control of the company.
The government said in announcing the measure that the same business test, which can also sometimes prevent companies from claiming past year losses as a tax deduction where they have changed their business, will be relaxed and a “similar business test” introduced.
The “similar business test” approach
“This more flexible approach to accessing company losses will ensure that companies do not face tax penalties for innovating and risk tasking in an effort to improve their business,” the government announcement said. “Loosening the inflexible rules will encourage investment and growth in our innovative businesses.”
The new relaxed test applies to losses made in income years commencing from 1 July 2015.
The “similar business test” also helps work out whether a debt written off as bad can be deducted in an income year, and whether tax losses of listed widely held trusts can be used.
The government says the similar business test will encourage entrepreneurship by allowing companies to use losses in a wider range of circumstances and will encourage companies to “seek out new opportunities, and hopefully return to profitability”.
Four factors of the ‘similar business approach’
However, the new test will still be required to meet four factors, including:
- the extent to which the assets (including goodwill) used to generate income were also used formerly
- the extent to which the activities and operations were also the same as 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.
The ATO’s guidance on the “similar business test” approach
Note that the new measure is not a free-for-all, however. Guidance issued by the ATO indicates that it will not be enough if a business is of a similar “type” to a previous business. It says a business is “similar” where there is an element of continuity, and that it has evolved or organically grown over time without changing its core identity or core source of income. It may not be sufficient that the change in business is a “reasonable” business decision or one that makes commercial sense if there is no continuity of the original business.
While entering a new business or new transaction may not necessarily cause the similar business test to fail (as it has been known to with the previous “same business” test) the new test may be more difficult to satisfy if substantial new business activities and transactions do not evolve from and complement the former business.