The ATO released Draft Law Companion Guideline LCG 2017/D6 on 21 July 2017. This provides guidance on the new similar business test currently proposed by Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017.
Under this test, a company will be able to utilise tax losses made from carrying on a business against income derived from carrying on a similar business following a change in ownership or control.
The Draft Guideline indicates that 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. In contrast, where a company develops a new product or function from the business activities already carried on, and this development opens up a new business opportunity or allows the company to fill an existing gap in the market, the business as a whole is likely to satisfy the similar business test.
The four factors that must be taken into account, in determining whether a business remains sufficiently similar, require a comparison between the essential characteristics of the business before and after the relevant change in ownership or control. These four factors do not limit consideration of any other matter that may be relevant to this determination and all factors are weighed up against each other to establish whether the business satisfies the similar business test.
• The first factor considers 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.
• The second factor compares 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.
• The third factor compares the current identity of the business with that of the business carried on before the test time. Where new activities have not resulted in the identity of the business changing, then this factor would indicate that the business remains relevantly similar to that previously carried on.
• The fourth factor requires 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.
The first three factors are concerned with the aspects of the business that have continued, while the fourth factor assesses the nature of any changes that have happened. Where those changes are due to an innovative evolution or development of the business, the business is more likely to be similar to that previously carried on.
The Draft Guideline includes various examples to demonstrate the approach the ATO will take in assessing whether a company satisfies the similar business test to highlight the four legislative factors that are to be taken into account.
This new similar business test will apply for income years starting on or after 1 July 2015.