There are some recent updates and changes which have been made to tax-loss continuity rules in light of the recent resurgence of Covid-19 in 2021. These changes are aimed at understanding the needs of businesses to raise additional capital to stay operational.
The legislation is aimed at being passed before the end of March, 2021 and will be applicable for the 2021/22 tax year and later income years as well.
As part of the changes being made, the government has announced the “same or similar business test”.
Currently, the law states that if a company or an organisation has more than a 51% change in ownership it cannot keep its tax losses. With the introduction of the ‘same or similar business’ businesses can now carry forward their losses. In order to meet the requirements of the test, the business in question must continue in a same or similar way to how it did prior to the change in ownership.
Companies at this point in time might be looking to raise capital to keep afloat for now and to recover in the future. Raising the capital though, may result in a change to the existing shareholding structure within the company. The changes which are aimed to relax the rules will ensure companies in this position can carry forward losses to offset income when it turns to profit. The ability to carry forward losses will help in making the business more valuable to investors. The new rules should also help in improving access to capital for businesses.
The same or similar business test is essentially a business continuity test which allows a company to carry its losses forward after a change in ownership, as long as the underlying business continues.
Even with the new changes, this doesn’t imply that the 49% continuity test has been replaced in any way. If a company continues to satisfy the existing 49% of the rules, they won’t have to rely on the Business Continuity Test.
There is no change to the commonality rule either which requires 66% commonality of ownership for companies to offset losses. In case one company acquires another company with losses, it will be not be able to offset pre-acquisition losses from that company. In case the company being purchased is a dormant company the test will not allow dormant companies to carry forward those losses.
All carry-forward losses won’t be subject to the test. Only losses incurred from the 2013/14 year onwards will be able to be carried forward under this test.
Some more guidance on the law will be released in draft after the SOP is released. However, if you have any queries regarding the proposed changes or how it might affect your business, feel free to get in touch with us by mailing us at firstname.lastname@example.org or by calling us on +64-9-972-2236.
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