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New flexible business test for tax losses introduced

Jotham Lian
Jotham Lian
13 February 2019 2 minute readShare
Robyn Jacobson, Tax Banter

Businesses will be granted a greater deal of flexibility in working out whether tax losses and net capital losses from previous income years can be used to claim deductions, under a newly passed law.

Both houses of federal parliament have passed the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill, that will see the ‘same business test’ supplemented with a more flexible ‘similar business test’, 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 ‘similar business test’ also applies in working 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 change comes as businesses may be discouraged to innovate or adapt their business to changing economic circumstances in order to satisfy the ‘same business test’.

Accordingly, the similar business test aims to encourage entrepreneurship by allowing companies to use losses in a wider range of circumstances. It also encourages companies to seek out new business opportunities and return to profitability.

However, the ‘similar business test’ will still need to meet four factors, which are not exhaustive, including:

• 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.
• 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 My Business’ sister title Accountants Daily, Tax Banter senior tax trainer Robyn Jacobson (pictured) said the new measure would be helpful for start-up and innovation companies, which are often more prone to losses and changes of ownership.

“This similar business test is a little bit more flexible and it ensures that if your activities are broadly the same like similar income producing activities or similar assets, then you can pass the similar business test even if the business is not identical to the one that was carried on prior to the losses being made,” she said.

“I still think it is going to be a challenge for an adviser to sit down and look at a circumstance or a business activity and make a call that it is a similar business to the one being carried on before the loss is made.

“And given that there are significant dollars involved, it may be that people will still prefer to go and obtain a private ruling or seek specialist tax advice than make the call themselves, so that’s something each taxpayer will have to work through with their adviser.”

Ms Jacobson added: “Anybody who failed the same business test could possibly now consider if they are entitled to apply the similar business test and they could possibly use their losses, but that would be on a case-by-case basis.”

New flexible business test for tax losses introduced
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Jotham Lian
Jotham Lian

Adam Zuchetti is the former editor of MyBusiness and a senior freelance media professional, specialising in the fields of business, personal finance and property. In 2020, he also embarked on his own business journey – inspired in part by the entrepreneurs and founders he had met through his journalistic work – with the launch of customised pet gifting and subscription service Paws N’ All.

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