With the flurry of tax changes recently, there has been plenty to talk about. However, one change that hasn’t had much attention is the introduction of a “business continuity test” for carrying forward tax losses
Previously, a company would forfeit any tax losses it had if its ownership changed by more than 51%. The rationale behind this was to ensure the shareholders who owned the company when it benefited from the losses were the same shareholders who effectively funded the losses and to therefore prevent “trading” tax losses, but the downside was the cost it imposed on legitimate restructuring or recapitalising efforts. Who wants to throw hundreds of thousands of dollars of tax losses in the bin?
COVID-19 brought this issue, already on the IRD’s radar, into sharper focus. The intended consultation period was shelved and the new test was pushed through. A hybrid of Australia’s and the UK’s versions, the new test allows businesses to carry forward tax losses, regardless of changes in company ownership, provided there is “no major change” in the nature of the business.
What is a major change? Well, it depends. The intention is to allow businesses to make changes “in order to grow or be resilient” and not to stifle legitimate innovation.
What kinds of changes are allowed? The legislation lists 4 categories:
- Changes to increase efficiency
- Changes to keep up to date with advances in technology
- Changes due to upscaling or expanding (e.g. entering a new market)
- Changes to do/make something new using the same, or mainly the same, assets as the company did before continuity breach (think gin distillery to hand sanitizer!)
There’s no real downside here, as the new test is in addition to the old one (i.e. changes of less than 51% ownership don’t need to consider business continuity). It will make life a bit easier for anyone wanting to sell a business or take on new investment and capture the value of past tax losses.