Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 6 - Removal of the same business test cap

Outline of chapter

6.1 Schedule 6 to this Bill amends the company loss recoupment rules in the Income Tax Assessment Act 1997 (ITAA 1997) to remove the $100 million total income cap on the same business test.

Context of amendments

6.2 Under the company loss recoupment rules, a company (including the head company of a consolidated group or multiple entry consolidated group) is able to claim deductions for prior year losses only if it satisfies the continuity of ownership test or the same business test.

6.3 The continuity of ownership test broadly requires that the shares carrying more than 50 per cent of all voting, dividend and capital rights be beneficially owned by the same persons at all times during the ownership test period (ie, the period from the start of the loss year to the end of the income year in which the loss is to be deducted).

6.4 The same business test requires the company to carry on the same business in the income year the loss is claimed as a deduction and the 'test time' (which is either the point in time the continuity of ownership test is no longer satisfied, or the start of the income year when the loss is incurred where it is not practicable for the company to show that it has satisfied the continuity of ownership test). Companies with total income for an income year in excess of $100 million are denied access to the same business test for losses incurred on or after 1 July 2005.

6.5 In response to concerns raised by business and professional groups, the Government has reviewed the operation of the same business test. As a result of this review, the $100 million total income cap on the same business test will be removed.

Summary of new law

6.6 These amendments will improve the operation of the company loss recoupment rules by removing the $100 million total income cap on the same business test.

Comparison of key features of new law and current law

Detailed explanation of new law

6.7 The company loss recoupment rules will be modified to remove the $100 million total income cap on the same business test. [Schedule 6, items 1 and 2, sections 165-212A, 165-212B, 165-212C and 716-805]

6.8 Therefore, a company will be able to deduct prior year losses that are incurred on or after 1 July 2005 in an income year if:

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the company satisfies the continuity of ownership test; or

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the company satisfies the same business test.

6.9 Consequential amendments will remove various cross-references and notes that refer to the $100 million total income cap on the same business test. [Schedule 6, items 3 to 67, sections 165-5, 165-10, 165-13, 165-15, 165-23, 165-30, 165-35, 165-40, 165-45, 165-93, 165-99, 165-115, 165-115B, 165-115BA, 165-117, 165-120, 165-126, 165-129, 165-132, 165-210, 166-5, 166-20, 166-40, 175-5, 175-40, 175-80, 701-30, 707-120, 707-125, 707-135, 707-210, 715-15, 715-50, 715-55, 715-60, 715-70, 715-95, 715-355, 715-360, 716-850, 719-260, 719-285 and the definition of 'total income' in subsection 995-1(1) of the ITAA 1997]

Application and transitional provisions

6.10 These amendments will apply to:

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any tax loss that is incurred in an income year commencing on or after 1 July 2005;

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any net capital loss that is made in an income year commencing on or after 1 July 2005; and

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any deduction in respect of a bad debt that is incurred in an income year commencing on or after 1 July 2005.

[Schedule 6, item 68]

6.11 These amendments are beneficial to taxpayers as they will make it easier for companies to deduct prior year losses. The amendments apply from 1 July 2005 so that:

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companies with total income in excess of $100 million that satisfy the same business test are not denied access to losses incurred since 1 July 2005; and

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companies do not incur additional compliance costs by having to separately keep track of losses incurred since 1 July 2005.