This draft Bill implements the announcement last year to supplement the “same business test” with a more flexible “similar business test” to improve access to losses for companies that have changed ownership.
When the announcement was made many of us wondered how the Government would define such a test, especially as the term “similar” is highly subjective.
Well we now know – they just did not define it.
For the second time in relation to these “innovation tax changes” the Government has decided to make assessing if you can use these changes unbelievably hard.
The new “similar business” test, which applies in addition to the same business test, require that to carry forward the loss if you fail the COT , the business carried on throughout the business continuity test period must be “similar” to the business carried on immediately before the test time.
“Similar” is not defined and only three factors, which the law clearly states are not exhaustive, are offered to help us decide what is similar:
- The extent to which the assets (including goodwill) that are used in its current business to generate assessable income were also used in the company’s former business to generate assessable income;
- The extent to which the sources from which the current business generates assessable income were also the sources from which the former business generated assessable income; and
- Whether any changes to the former business are changes that would reasonably be expected to have been made to a similarly placed business.
But don’t think you need to pass all these three factors. The examples in the EM have companies that pass and fail many of these three tests and some can use the “similar” test and others cannot.
From these examples it appears that:
- An online retail company that sells various household furniture items from established brands that then develops its own mattresses, outsourced the manufacturing to a local factory and sells its own mattresses as well as household furniture items from established brands is undertaking a substantially similar business.
- A plastic manufacturer who discovers their process to make the plastic can be used to make teeth whitener and so adds this product to their sales is carrying on a substantially similar business.
- Going from producing, bottling and wholesaling your own iced tea to just bottling someone else’s iced tea is not substantially similar.
- Changing a homewares shop into a shop selling high-end stationery products and art supplies is not substantially similar.
Once again, taxpayers and advisors will be left uncertain whether they pass this test without getting a private ruling, or the Commissioner clarifying the law in a public ruling (the Government once again outsourcing its detailed policy work to the Commissioner of Taxation?)