Changes to the Loss Recoupment Rules – The Similar Business Test

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Changes to the Loss Recoupment Rules – The Similar Business Test


The government has recently introduced draft legislation which proposes to create a new framework for determining whether a company recoup tax losses that it incurred prior to a change of control or ownership.

The existing rules for loss recoupment are the the Continuity Of Ownership Test (COT) and the Same Business Test (SBT).   The COT is objective, however, the SBT is a subjective test and as a result has been a significant area of uncertainty.

The issue around the SBT has been the differing interpretations between advisers, the courts and the ATO.  The view from the ATO has essentially seen the SBT as the “identical Business test”, however, this has proven to be problematic in the modern era with highly dynamic businesses and changing environments.   As a result the government has released draft legislation to introduce a new and more flexible ‘similar business test’ to supplement the existing SBT.

The new test will apply to businesses that have had, or are expecting to have, a change of ownership and will apply to losses or bad debts incurred from 1 July 2015. The introduction of the similar business test is seeking to encourage companies to innovate and grow their business without the fear of forefeiting tax losses from prior years.

The existing legislation often discourages businesses to move forward with new transactions for fear of losing prior year losses.  The new legislation, is being introduced as part of the Government’s National Innovation and Science Agenda which is designed to allow more innovative freedom for business.  There are four main factors under the similar business test that are required to be examined before a business is determined similar;

  • Assets – the extent to which the assets (including goodwill) that are used to generate assessable income in the current business were used in the former business;
  • The extent to which the activities and operations from which the current business generates assessable income were also used in the former business to generate assessable income;
  • The identity of the business -  examining whether the new activities of the current business change the identity of the business;
  • Changes – examining the extent to which 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 new test is inherently broad in its application and it will be challenging for taxpayers to determine the exact scope of the term ‘similar’ when applying the rules to their business.  In certain respects, it could also be seen as being a change in the law to align the application of the SBT to adviser’s interpretation.  As such it is likely to lead to increased challenges and reviews from the ATO especially in the early years of its application.

Should you require assistance in relation to this matter or would like additional information, please call your relevant ESV engagement partner on 02 9283 1666.