Using prior tax losses after a change in control: ATO guidance

Has your company made a tax loss in recent years? If new investors or a major share sale is on the cards, the company may benefit from flexible new rules allowing access to prior losses – the key requirement being that the business carried on, post-equity restructure, is “similar”. Here we look at some practical ATO case studies illustrating when a business is “similar”.

Until recently, a company that had experienced a significant change in ownership or control could only carry forward its earlier tax losses to a later income year if the company carried on the “same” business after the change. However, a new alternative test that applies retrospectively from 1 July 2015 means that now companies only need to carry on a “similar” business.

What exactly does “similar” mean? The legislation outlines several factors you must consider when assessing whether your business is “similar”. This is a non-exhaustive list, and it requires a weighing-up of all relevant factors. The ATO unpacks the legislation as follows:

• First, you need to consider the following three things and compare them before and after the significant change in control of the company: the assets (including goodwill) used in the business, the activities and operations, and the “identity” of the business.
• Then, where there have been some changes, you need to identify to what extent these can be explained by development or commercialisation of the business that existed before the change in control. If the changes resulted from a natural evolution or development of the business, this suggests a similar business is now carried on. In contrast, if the changes occurred because the company simply made a commercial decision to make those changes, it is less likely the business is similar.

The ATO illustrates this through the example of a parcel courier company that expands its services to include food delivery (servicing a new market, the restaurant industry). If this new activity commenced because the company undertook research and development (R&D) to improve its bicycle design in order to improve efficiency, and as a result developed a new bicycle that it realised was suitable for transporting food, the service expansion results from development of the earlier business and thus the similar business test is satisfied.

In contrast, if the company commenced this activity because it noticed a growing demand for food delivery services and purchased a new type of bicycle to embark on that opportunity, that would weigh against the current business being similar.

The ATO also focuses on the activities from which the business generates most of its income. For example, consider a gold mining company that also accesses copper ore during the mining process, but discards this copper because of low copper prices. If the price of copper rises and the company decides to invest in new equipment and staff to process and sell the copper, the company could still pass the similar business test if its assessable income from selling copper is insignificant compared to the income from selling gold.

The company’s core business activity is still gold mining. It is also relevant that selling copper was always envisaged as a possible activity.

The ATO also emphasises that goodwill is an important asset to consider. For example, if a low-cost fast food chain reinvents itself by changing its menu to premium foods, adopting a new brand name and transforming its interior design, it won’t pass the similar business test.

The goodwill associated with the old brand name and image isn’t used in the current business, and this isn’t the result of any natural development of the old business (but rather a commercial decision to present a new identity to the public). This is so, even if it uses the same suppliers, maintains some of the same food production processes and operates from the same physical retail locations.

Don’t let your losses go

Planning a share sale or equity capital raising? Contact our office today for expert advice on getting the most out of your business’ prior losses.

Courtesy of Thomson Reuters