​Commonwealth releases draft income tax legislation to overhaul 'same business' test

The Australian government has published draft legislation on increasing access to company losses, expecting the ability to offset losses against other profits to spark local innovation.
Written by Asha Barbaschow, Contributor

The Federal government has released draft legislation centred on providing companies with access to past year tax losses to reduce taxable income, in a bid to incentivise and reward innovation.

The Exposure Draft Bill [PDF] contains proposed amendments to the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 to supplement the "same business test" with a more flexible similar business test to improve access to losses for companies that have changed ownership.

Under current law, businesses that have changed ownership must satisfy the 'same business test' to access past year tax losses, a process the government labelled as restrictive, stifling innovation in the economy.

The main concern is with the word 'same', as it does not allow movement, with the government adding, "same does not mean similar".

"The inability to utilise losses where a company has entered into new types of transactions or business activities inhibits a company's ability to grow," the government said in a statement.

"This discourages companies which have made losses from seeking new investors or exploring new profit-making activities because they may lose access to these valuable past year losses."

Instead, the National Innovation and Science Agenda - Increasing Access to Company Losses draft legislation suggests "same business test" be swapped out for a "similar business test" for the purpose of determining whether a company's tax losses from previous income years can be utilised.

The draft legislation says a company will pass the similar business test if its current business is a similar business to its former business. This will depend on the extent to which the company generates assessable income from the same assets and sources, and whether any changes to the business are changes that would reasonably be expected to have been made to a similarly placed business.

According to the Treasury, current law -- and the same business test in particular -- can disadvantage startups and smaller companies, who may only have one income stream.

"Larger and more established companies can often use the losses from one business activity to offset profits from another activity in any given year, removing the need to carry-forward losses. A smaller company or a start-up may not have this opportunity, meaning they need to carry the loss forward and apply the restrictive tests," the Treasury said.

"This measure will encourage entrepreneurship by allowing loss-making businesses to seek out new opportunities to return to profitability."

Previously, the government said that companies making a loss can be deterred from seeking out new business opportunities for fear that they will lose access to valuable past year losses.

"The ability to offset losses against other profits is particularly important for small innovative companies because they are often cash-poor and have less diverse income streams in comparison to well established businesses," the government said in a statement [PDF].

"This measure will encourage entrepreneurship by allowing loss making companies to 'pivot' and seek out new opportunities to return to profitability."

The legislation draft forms part of the government's AU$1.1 Innovation and Science Agenda it unveiled in December.

The agenda outlined over 20 different measures, focused on for four key areas: Culture and capital to help businesses embrace risk and incentivise early stage startup investment; collaboration to increase engagement between businesses, universities, and the research sector; talent and skills to train students for the jobs of the future and attract innovative talent from abroad; and for the government to lead by example by investing in, and using technology and data to deliver better quality services.

Building on the crowd sourced equity funding legislation released last year, the agenda also sees the increase in early investment capital from AU$100 million to AU$200 million; a 20 percent non-refundable investment tax offset capped at AU$200,000 per investor per year; a 10-year capital gains tax exemption; and a reduction in bankruptcy default from three years to one.

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