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ATO clarifies business loss utilisation provisions under COVID-19

Adrian Flores
Adrian Flores
23 October 2020 1 minute readShare
ATO

The Australian Taxation Office has warned businesses that impacts of COVID-19 may have resulted in changes affecting their ability to utilise carried-forward losses in the current or a future income year.

For companies to utilise their carried-forward losses in a particular year, they need to satisfy the continuity of ownership test, the ATO said in its latest business bulletin.

If a business fails the COT, they will need to satisfy the business continuity test instead.

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However, the Tax Office noted that the mere receipt of JobKeeper payments will not cause a company to fail the business continuity test.

“Examples of COVID-19 impacts on companies include where it suddenly changes its business model or activities, or where a company closes its business. Whether a company can utilise carried-forward losses requires a consideration of its facts and circumstances,” the ATO said.

 

“Generally, a company that has completely closed its business with no intention to resume will fail the business continuity test. However, a company that has temporarily closed its business may still be able to satisfy the business continuity test.”

The continuity of ownership test

The continuity of ownership 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”.

This is the period from the start of the loss year to the end of the income year in which the loss is to be deducted.

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Business continuity test

The ATO recently introduced the similar business test, whereby tax losses can be utilised from carrying on a business against income derived from carrying on a similar business following a change in ownership or control.

The similar business test broadly applies to:

  • A tax loss incurred for income years beginning on or after 1 July 2015 (including, by virtue of section 65-40 of the ITAA 1997, a tax offset the company has carried forward where the company became entitled to the tax offset in income years beginning on or after 1 July 2015)
  • A net capital loss made for income years beginning on or after 1 July 2015
  • Working out the taxable income and tax loss, and net capital gain and net capital loss, in an income year beginning on or after 1 July 2015 because a change of ownership has occurred in that income year
  • An unrealised loss in relation to a CGT asset[5], where the income year immediately before the one in which a change of ownership or control occurs is an income year beginning on or after 1 July 2015
  • A debt incurred in income years beginning on or after 1 July 2015 that the company writes off as bad

To view the full ATO ruling on the business continuity test as it applies to carrying on a similar business, click here.

ATO clarifies business loss utilisation provisions under COVID-19
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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