How can I restructure my business to preserve the tax benefits of past losses?

Medical Accounting

It’s naïve to expect untempered success in business. No matter how your business may start, no matter how your profit margins increase over successive years, wise planning looks ahead to leaner times. And such times can make small business owners consider business closure, or at least, business restructuring.

Restructuring in light of diminishing returns provides avenues for turning your business around. More specifically, it gives you a chance to turn around your financial fortunes by changing the way you do business. This may mean effectively starting a whole new enterprise as a result of the restructure.

Yet this then raises questions regarding tax. The losses you incur from a stalling business can give you sleepless nights, but when the time comes to restructure and launch your business afresh, they can serve as a benefit. Taking into account past losses can help mitigate the tax obligations of your new business.

However, whether or not you can claim these past losses against income made by your new venture depends on the ‘similar business test’.

The similar business test is new on the tax scene. It combines with the same business test (SBT) and comes into play under the business continuity test. This was introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 201928, and broadly applies in relation to income years commencing on or after 1 July 2015. On 22 May 2019, the Commissioner issued the Law Companion Ruling LCR 2019/1 entitled The Business continuity test – carrying on a similar business.

Put simply, the new ruling broadens your ability to claim unutilised losses in the tax accounting of a new business. You do not need to be running the same business after a restructure. You do not even need to be running a similar type of business.

The similar business rule looks at the identity, activity, and assets of a business. It explores whether there is sufficient continuity between a past business and a new business in these areas.

  • To what extent does the new business use assets from the past business to generate income?
  • To what extent are activities that generated assessable income in the past business similar to those in the new business?
  • How has the identity of the business changed?
  • To what extent are the assets, products, processes, services, marketing, or organisational methods of the new business a development of the old business?

The Commissioner’s ruling itself provides examples. A bicycle courier company that delivers documents and parcels to offices develops a new lightweight bicycle. It attaches a new insulated box to its bicycles that allows the company to move into food and beverages transport. Soon, the company has made a number of further changes and is catering to the delivery needs of restaurants and cafes as much as it is to those of nearby offices.

Under the similar business test, the tangible and intangible assets of the new food delivery business are similar to those it has used previously. The core business activity of document delivery remains, but has developed to include new food and beverage items. A new booking system and other R&D changes have seen the company identity expand and evolve. The shift in business has been a development of old business activities. In this way, the business passes the similar business test.

It can therefore use any losses in its tax planning as it starts its new business activity. The lesson here is that it is vital for you and your business advisor to consider the links between old and new businesses when you are restructuring in order to take full benefit of unutilised losses when you start your new venture.

Calibre Business Advisory invests more time than most firms into finding solutions for our clients. Contact our business advisors and tax accountants to discover new options for your business in Australia and beyond.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.