New Similar Business Test to Incentivise Innovation by Increasing Access to Carry Forward Loss Rules

April, 2016

On 6 April 2016 the Federal Government released exposure draft legislation to allow businesses that have changed ownership to access past year tax losses if they satisfy a similar business test.

The draft legislation follows the Government’s announcement on 7 December 2015 of a raft of measures proposed to incentivise and reward innovation as part of its National Innovation and Science Agenda.

Under the current law, businesses are able to carry forward and deduct tax losses incurred in one income year from assessable income earned in subsequent income years providing they satisfy a continuity of ownership or a same business test. The tests are also used to work out:

Under the proposed legislation, the same business test is supplemented by a similar business test. A business will now satisfy the ‘business continuity test’ if it is similar to a prior business in an earlier test period. In working out whether a business is ‘similar’ to a prior business, three non-exhaustive factors are relevant:



    1.  The extent to which assets used in the current business to generate assessable income were also used in the former business to generate assessable income is relevant.  The explanatory memorandum indicates the assets used to generate income can include physical assets (such as plant and equipment) as well as intangible assets (such as intellectual property) and goodwill. For example, a business selling products or services using the same brand or leveraging off the same site or personal goodwill may satisfy the similar business test, whilst a business that launches a new brand may not.



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 is relevant. The sources that may be used to link the current business to the former business will be the specific activities or operations from which it derives its assessable income. They may be the types of products or services that the business sells. So whilst a business selling the same products or services to new markets might satisfy the similar business test, a new business selling different products or services may not.



It is relevant whether changes to the former business are changes that would reasonably be expected to have been made to a similarly placed business. The explanatory material indicates the question to be answered is whether a reasonable person would consider there to be ‘a degree of organic connection and continuity’ between the current business and the former business and whether the change is a ‘natural one’ for the business to make.  For example, the development by a ‘bricks and mortar business’ of an e-commerce sales line for its products and services using equity investment from third parties may satisfy this criteria.


Importantly, the provisions contain similar integrity measures to the same business test which prohibit using the rules to take advantage of losses to avoid income tax. So where equity is invested to take advantage of losses rather than to assist a business make a ‘reasonably expected change’ and to innovate using its assets and sources of business, then the rules may not be satisfied.

The draft legislation and supporting material is available here. Interested parties are invited to comment.  Submissions are due by 22 April 2016.

Contact Mills Oakley

For more information, please contact:


Stuart O’Neill
Special Counsel
T: +61 7 3228 0426

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