Growing businesses to be given greater access to company losses for tax offsets

The federal government will seek to relax the rules around how growing businesses can access company losses for tax purposes as part of its innovation agenda.

Handing down its innovation statement yesterday afternoon, the government said it will relax the “same business test” that currently applies to companies accessing company losses when making “minor changes to their operations” and replace it with a more flexible “predominantly similar business test”.

“When companies make a loss, they can be discouraged from taking the leap and exploring other profit-making activities for the reasonable fear that they will be denied access to valuable prior-year tax losses,” the government said.

“The ability to offset losses against other profits is particularly important for small innovative companies because they have less diverse income streams and cash flow than established businesses.”

Under the current tax laws, companies that make a loss can carry forward that loss to offset against future income providing the shareholding of the company remains at least more than 50% the same.

However, if a company that has made a loss brings in outside investment to help develop its product or service and subsequently transfers more than 50% of ownership in the company to others, it must pass the “same business test” in order to access previous losses for tax purposes.

Under the change being proposed by the government, these companies that have changed ownership structure will only need to pass a more relaxed “predominantly similar business test” to access these past losses.

Legislation for the new test is expected to be introduced in the first half of 2016, with the “predominantly similar business test” to apply to losses made in the current and future income years. Current tests will apply to any existing loans.

Des Caulfield, director at MGI Adelaide, told SmartCompany this morning the proposed change is “extremely important” and together with other aspects of the government’s innovation agenda, will “make it a lot easier for people to have a go”.

Caulfield says the current “same business test” is “really tight” and difficult for businesses to pass.

“It’s an extremely important change they’ve made,” he says.

While the change does not apply to businesses that are not seeking to change ownership structure, which have always been able to carry forward past losses, Caulfield says the reform is an “incentive” for venture capitalists to invest in innovative businesses as the investors effectively get access to previous losses to offset against future tax bills.

“It’s for businesses that need extra capital to expand; they can do so without fear,” he says.

Caulfield also welcomes the proposed changes to insolvency laws, which he says also demonstrate the broad approach the government is taking to its innovation policies.

“They have thought it through and not been narrow in their approach to this,” he says. 

Ali Suleyman, partner in tax consulting at Pitcher Partners, told SmartCompany any move to relax the current “same business test” is welcome, however, the “devil will be in the detail”.

Suleyman says the government has not yet released details about what will be included in the “predominantly similar business test” and so businesses will likely have to wait until legislation is prepared to see how the change will affect them.

However, Suleyman says the move to increase access to company losses is a step “in the right direction”.

“Whether it goes far enough will be revealed when there is legislation,” he says.

Suleyman says there is “plenty” in the innovation statement for startups but says the fact that many of the policies may not come into effect until after July 2016 may create some uncertainty and put some businesses in a “holding pattern”. 

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