Legislation has been introduced to make it easier for companies (and listed widely held trusts) to access losses from prior years, where there has been a change in the entity’s underlying ownership. The draft legislation proposes to replace the “same business test” with a more flexible “similar business test” with retrospective effect from 1 July 2015. No changes to the continuity of ownership test are proposed, and the ability of trusts other than listed widely held trusts to carry forward losses has not been impacted.


  • The Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 ("Bill") introduces new measures to make it easier for loss-making companies and listed widely held trusts to return to profitability.
  • The proposed amendments broaden the test which allows these entities to use losses incurred in prior years, where there has been a change in underlying ownership.
  • The current “same business test” has been applied strictly, and has led to uneconomical outcomes. The new test is intended to provide greater flexibility than the same business test. The proposed reform is clearly to be welcomed.
  • The changes will apply retrospectively to tax losses, net capital losses and bad debts of companies, and losses of listed widely held trusts, incurred on or after 1 July 2015.

Current legislation: The same business test

If the “continuity of ownership test” (“COT”) or the 50% stake test is failed, the entity’s prior year losses will only be accessible where the “same business test” is satisfied. The COT is failed when a company undergoes a substantial change in ownership or control (i.e. where shares carrying more than 50% of voting, dividend and capital rights are no longer beneficially held by the same persons). The 50% stake test is applied to listed widely held trusts (and there must not have been abnormal trading).

A company will pass the “same business test” provided it carries on an “identical business” to the business carried on previously (Avondale Motors (Parts) v Federal Commissioner of Taxation (1971) 124 CLR 97). Negative limbs in the current legislation require that the entity does not carry on a business, or enter into a transaction, of a kind that it did not carry on or enter into previously.

This has the potential to lead to uncommercial outcomes and can limit some entities from expanding aspects of their business.

Proposed amendments: The similar business test

The proposed “similar business test” consists of four key factors:

  1. whether the same assets are used to generate income;
  2. whether income is generated from the same activities and operations;
  3. whether the identity of the business is retained; and
  4. the extent to which any changes to the former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business.

These factors have been redrafted since the Exposure Draft released in December 2015. Factor (c) is a new factor which has been added and will require a comparison between the core functions of the business before and after the acquisition.

Factor (d) has replaced a catch-all factor which asked whether the changes would reasonably be expected to have been made to a similarly placed business.

Need to maintain core identity and operations

The similar business test permits certain differences between the current and former business (i.e. they will not need to be “identical”). The focus remains on preserving the core identity and operations of the entity, which mitigates the risk of abuse which could occur where a company purchases a loss-making business for the purpose of sheltering its own assessable income.

The strict negative limbs will be removed. The test is still one of fact and degree. It is likely that some taxpayers will only be able to achieve comfort on the rule’s application to certain transactions by seeking a private ruling from the Australian Taxation Office ("ATO"). The ATO is expected to either update its current ruling on the same business test (TR 1999/9) or issue new guidance.