The Australian Taxation Office (ATO) has updated its guidance on the loss carry-back scheme, reiterating the eligibility criteria which require incorporated businesses to meet one of two tests: the continuity of ownership test (COT) or the business continuity test (BCT).
The COT test requires that a company’s shares carrying more than 50 per cent of all voting, dividend and capital rights be beneficially owned by the same persons at all times during the “ownership test period”, while the BCT requires companies to carry on either the same business or a similar business during a relevant period.
However, the ATO has now clarified that while companies that have closed their business with no intention to resume will not pass the BCT, those that have reduced the scale of their business or closed temporarily due to “temporary adversity” may still be able to access a refund.
In determining whether a company’s business is still being carried on, the ATO will look to determine the reasons for the inactivity — for example, whether the company is actively holding itself out for business though obtaining none, and whether there is the expectation of resuming active operations within a reasonable time.
“These principles should be taken into account if a company’s business has been affected by circumstances relating to COVID-19 after its majority ownership has changed,” the ATO said.
“For instance, if a gym closes temporarily for three months because of restrictions on its operations, this will not cause it to fail the same business test or similar business test.”
The Tax Office also confirmed that a company will not fail the same business test or similar business test merely because it has received JobKeeper payments.
“Whether a company can utilise carried-forward losses requires a consideration of its facts and circumstances,” the ATO said.
According to the rules, companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
The loss carry-back was first introduced in 2012, but it was scrapped a year later with the repeal of the mineral resource rent tax.
Speaking exclusively to MyBusiness following the budget reveal, Tony Greco, general manager of technical policy at the IPA, welcomed the reintroduction of this measure, noting that it should be a permanent part of the tax system.
“It provides that automatic stabiliser in the sense that if you have a bad year, you crawl back tax that was paid in an earlier year so you get the benefit of the loss a lot sooner,” Mr Greco explained.
“It’s a very important feature when an economy goes into recession and COVID is the perfect scenario.”