Similar business test
The Same Business Test (SBT) has been replaced by the Similar Business Test (SimBT), with retrospective application. There is an opportunity to consider whether the outcome will be different under the new application and amend prior year tax returns.
Historically, in order to recoup tax losses after a majority change in ownership or control, a company was required to satisfy the SBT. On 1 March 2019, after considerable delay, the Government passed amendments to the loss integrity provisions via the Treasury Laws Amendment (2017 Enterprise Incentives No 1) Act 2019.
Now referred to as the SimBT, the new rules have a retrospective application to revenue and capital losses made in an income year commencing on or after 1 July 2015. In preparing year-end tax calculations we would recommend you use this opportunity to consider whether losses incurred post 1 July 2015 will satisfy SimBT and amend prior year returns as appropriate.
Tax losses can be carried forward and deducted from assessable income in future income years if the company passes either:
- the continuity of ownership test (COT); or
- on failing the COT, the SBT.
Historically, a company satisfied the SBT if it carried on the ‘same’ business in the recoupment income year (ie the ‘same business test period’) as it carried on immediately before the change of ownership or control that caused the company to fail the COT (ie the ‘test time’). In addition, a company would not satisfy the SBT if the company failed the following ‘negative limbs’:
- derived assessable income from a business of a kind that it did not carry on before the test time (the ‘new business test’); or
- derived assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the test time (the ‘new transaction test’).
Industry commentary on the application of the former SBT has long since maintained recouping tax losses after a COT failure was not only time consuming and costly for taxpayers but often unsuccessful. This was predominantly due to the ambiguity and inflexibility of the rules with significant ATO precedent determining that the businesses being compared under the former SBT needed to not only be the ‘same’ but ‘identical’. As a result, the former rules were regularly criticised as stifling business and economic organic growth with reform heavily demanded.
In recognition of the above, and in line with the Government's National Science and Innovation Agenda, the Government legislated the SimBT. The SimBT has been designed as an alternative, more flexible test to the SBT. Specifically, it addresses the inherent limitations associated with the negative limbs of the SBT, however, there remains an element of uncertainty in its application.
Essentially, a company can carry forward and utilise its prior year losses if it carries on a business which is ‘similar’ to the business carried on immediately before the time the COT is failed. In working out whether a business is ‘similar’, regard must be had to the following factors:
- the extent to which the assets (including goodwill) that are used in the current business to generate assessable income were also used in the company’s former business to generate assessable income;
- the extent to which the activities and operations from which the current business generates assessable income were also the activities and operations from which the former business generated assessable income;
- 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.
Guidance to date confirms not one factor is taken to have more weighting than any other. Further Law Companion Ruling 2019/1 in paragraph 8 highlights the inherent subjectivity of the SimBT stating:
“These four factors do not limit consideration of any other matter that may be relevant to this determination. The weight to be given to each factor will depend on the facts and circumstances of each case.”
As a result, on application of the SimBT, a comparison and weighing up of each of the factors (the above not being an exhaustive list) including an analysis of the relative importance of each of the factors will determine if the SimBT has been met on an overall basis. Applying the SimBT is, therefore, in practice, prone to some subjectivity with current ATO guidance failing to address the complex nature of satisfying the SimBT.
Unfortunately, the change from the SBT to the SimBT has not made the recoupment of tax losses post a COT failure any easier.
Ambiguity remains in relation to the assessment of the non-exhaustive list of factors the Commissioner considers in determining whether a business is ‘similar’. As a result, significant attention will need to be taken in the consideration of a company’s particular facts and circumstances to ensure appropriate supporting information is present to substantiate any positions taken. In many instances, recoupment under the SimBT may require a Private Ruling from the Commissioner.
Taxpayers who were denied recoupment of carry forward tax losses under the SBT in either the 2016, 2017 or 2018 income years may wish to consider whether the outcome would be different on retrospective application of the SimBT. If so, there is scope within the new rules to amend the earlier assessment.
For more information about SimBT
If assistance is required in relation to the application of the SimBT or understanding a tax loss, please don’t hesitate to contact a member of our team.