When companies make a loss, they can be discouraged from taking the leap and exploring other profit-making activities for the reasonable fear that they will be denied access to valuable prior-year tax losses. The ability to offset losses against other profits is particularly important for small innovative companies because they have less diverse income streams and cash flow than established businesses.

Loosening inflexible rules that overly restrict access to company losses will help these businesses take sensible risks to get back in the black, and will ultimately encourage investment and growth in our innovative businesses.

What is changing?

To help businesses innovate and grow without fear of losing out, the Turnbull Government is being more flexible with access to company losses:

  • The current ‘same business test’ will be relaxed to allow businesses to access prior year losses when they have entered into new transactions or business activities. This will encourage entrepreneurship by allowing loss-making companies to seek out new opportunities to return to profitability.
  • A new and more flexible ‘predominantly similar business test’ will be introduced.
  • Under the ‘predominantly similar business test’ companies will be able to access losses where their business, while not the same, uses similar assets and generates income from similar sources.

When is it happening?

Treasury has been working closely with the Australian Tax Office to progress the preparation of draft legislation and guidance material for the reform of the ‘Same Business Test’.

A public consultation on draft legislation and guidance material commenced on 6 April 2016 and closed on Friday 22 April 2016. Find more information on The Treasury website.

What to do

How will this work in practice?

RePoly Pty Ltd has developed a way to turn algae into biodegradable plastic. It incurs large initial expenditure on manufacturing equipment. In the first three years of operation, RePoly makes a loss.

To ensure its viability, RePoly brings in an early stage (angel) investor who contributes additional capital. This results in a majority change in ownership.

After this change, RePoly seeks to expand its business in an effort to reach profitability. This expansion allows RePoly to make a profit in year four. RePoly seeks to offset its past losses against current year profits.

Possible treatment under existing law

RePoly would fail to meet the ‘same business test’ and access to past losses would be denied.

Possible treatment after new measure introduced

RePoly would pass the ‘predominantly similar business test’ because it makes use of the same assets, generates the majority of its income from the same business, and took advantage of an opportunity a similarly placed business would take advantage of. As a result, RePoly would be able to access past year losses.

 

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Information courtesy http://www.innovation.gov.au/