Chapter 7 - Schedule 6-Removal of the same business test cap
Overview
7.1
Schedule 6 of the bill seeks to amend the company loss recoupment rules
in the Income Tax Assessment Act 1997 to remove the $100 million total
income cap on the same business test.
Background and summary
7.2
Under the company loss recoupment rules, a company is only able to claim
deductions for prior year losses if it satisfies the continuity of ownership
test or the same business test.
7.3
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. The ownership test period is the period from the start of the loss year
to the end of the income year in which the loss is to be deducted.
7.4
The same business test requires a company to carry on the same business
in the income year a loss is claimed as a deduction at the 'test time'. The
'test time' is either the point in time that 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. Currently, 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.
7.5
These amendments seek to remove this $100 million total income cap on
the same business test. The amendments are to apply from 1 July 2005 so that:
- 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
- companies do not incur additional compliance costs by having to
separately keep track of losses incurred since 1 July 2005.
7.6
In summary, below is a comparison of key features of the current and
proposed new laws :
|
Current law |
Proposed new law |
|
A company can deduct prior
year losses that are incurred on or after 1 July 2005
in an income year if:
- the company
satisfies the continuity of ownership test; or
- the company's
total income for the income year is $100 million or less and it
satisfies the same business test.
|
A company will be able to
deduct prior year losses that are incurred on or after 1 July 2005 in an
income year if:
- the company
satisfies the continuity of ownership test; or
- the company
satisfies the same business test.
|
7.7
This measure will have the following revenue implications[1]:
|
2007-08 |
2008-09 |
2009-10 |
2010-11 |
|
-$15m |
-$40m |
-$50m |
-$70m |
Intended benefits of changes
7.8
These amendments are in response to concerns raised by business and
professional groups and would be beneficial to taxpayers as they would make it
easier for companies to deduct prior year losses by removing the $100 million
total income cap on the same business test.[2]
Issues in relation to the schedule
7.9
At the hearing Senator Murray expressed some concern about Treasury's
estimate of the revenue implications of lifting the $100 million cap on the
same business test.[3]
In the Explanatory Memorandum, Treasury estimates that removing the cap will
result in a revenue loss of $175 million over the four years from 2007–08 to
2010–11.[4]
At the hearing, Treasury noted that they were 'reasonably confident of that
costing', in part because:
When the same business test cap was brought in there was a
relaxation of the continuity of ownership test, so basically it was easier for
some companies to be able to claim losses applying the continuity of ownership
test, which meant that fewer companies needed to rely on the same business
test.[5]
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