As part of the tax changes implemented in March a new business continuity test was introduced in relation to tax losses carried forward
The loss continuity rules were originally implemented to prevent loss trading. That is, buying or acquiring a company with tax losses and using these to offset your other taxable income so no tax is paid.
While the regime met this objective, an area of concern was around raising capital. Often when raising capital, the ownership of a company can change. Particularly in the start-up space this change can be significant enough to breach the continuity requirements. The business continuity test was added to supplement the existing rules in this space and allow business to continue to carry forward losses where the business has not changed in nature.
While this sounds good, the test was subjective. This makes the application trickier than the current 49% objective test. The IRD has released a draft interpretation statement to provide some guidance to the application. The statement provides some examples of where the test would and would not be met along with a flowchart which will be helpful although ultimately it will be a question of judgement based on the specific facts of the transaction involved.
These rules do make some practical business sense in what is being tried to achieve however given the subjective nature our preference remains to still rely on the 49% continuity requirements where possible and only use these expanded rules where no other option exists.