ATO updates advice for businesses seeking to carry forward losses

Small and medium businesses that have been forced to temporarily close during the coronavirus pandemic may still be able to carry forward losses for tax purposes, according to updated advice from the Australian Taxation Office (ATO). 

To carry forward losses in a particular year, incorporated businesses either need to meet a continuity of ownership test (COT), which requires them to maintain the same majority ownership and control, or a business continuity test (BCT).

However, the ATO says it understands some businesses have needed to make significant changes to their operations in response to the COVID-19 pandemic. 

While companies that have closed completely during the pandemic with no intention to resume trading again will fail to meet the BCT, the ATO says businesses that have temporarily closed may still be able to meet the test. 

“If a company is still carrying on its business, it will not fail the same business test or similar business test merely because it has: reduced the scale of its business, including if its activities have reduced to a minimum or are almost entirely suspended; or suspended or temporarily closed its business only because of temporary adversity of due to reasons beyond its control which it intends to overcome,” explained the ATO. 

The ATO says it will consider a number of factors when determining whether a company’s business is still being carried on, including the reason for its inactivity and if the company is expected to resume operations in a “reasonable time”. 

“These principles should be taken into account if a company’s business has been affected by circumstances relating to COVID-19 after its majority ownership has changed,” said the ATO. 

“For instance, if a gym closes temporarily for three-months because of restrictions on its operations, this will not cause it to fail the same business test or similar business test.”

The ATO has also clarified that businesses can still meet the BCT if they have received JobKeeper payments, or continue to do so. 

“Whether a company can utilise carried-forward losses requires a consideration of its facts and circumstances,” said the ATO. 

Further information is available on the ATO website here.