The ATO has released Law Companion Guideline LCG 2017/D6 on how the ATO will apply the new "similar business test" to supplement the existing "same business test" used for testing whether a company can utilise an earlier year tax loss.
The draft guideline says the similar business test will operate in a way that is comparable to the same business test, and that the overall business of a company must satisfy the similar business test to access losses. In this context, "similar" does not mean similar "kind" or "type" of business. The focus remains on the identity of a business, as well as continuity of business activities and use of assets to generate assessable income. Accordingly, it will be more difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time.
The draft says that the following four factors must be taken into account, weighed up against each other, to establish whether the business satisfies the similar business test:
- The extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time.
- Comparison of the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously.
- Comparison of the current identity of the business with that of the business carried on before the test. Where new activities have not resulted in an identity change the draft says this will suffice.
- An assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business. In the interests of encouraging innovation, the ATO says such changes will not, in themselves, cause a business to be considered dissimilar.