BUSINESS CONTINUITY TEST AMENDMENTS INTRODUCED

BUSINESS CONTINUITY TEST

SUMMARY:

Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 was introduced in March 2021 to loosen the loss continuity rules to help the economy recover from Covid-19.

Previously, the business was only able to carry forward the losses when the 49 percent continuity of ownership has been maintained.

Now, the business continuity test could be used as an alternative test that allows a company to carry forward losses if there is no major change in the nature of the business activities of the company from the time immediately before the breaching change in ownership up until the end of the fifth income year following the change in ownership.

APPLICATION DATE:

The business continuity test applies to breaches of ownership continuity occurring in the 2020–21 and later income years and to losses arising from the 2013–14 income year onwards.

EXCEPTIONS:

1. Mineral mining companies.
2. The company ceases to carry on business activities during the continuity period.
3. The five-year rule will not apply to a company that carries forward losses that comprise 50 percent or more bad debt deductions claimed (mainly Finance companies). The continuity period for these companies will run from the time immediately before the breaching change in ownership until the time the loss is used up.

WHAT IS “MAJOR CHANGE IN THE NATURE OF THE BUSINESS” REFERRING TO?

A significant change in assets as they are a key resource that a company could use to generate income. "Assets" is intended to take an ordinary meaning and includes tangible and intangible (for example, goodwill) assets.

However, it may be accepted that some categories of assets require replacement. Also, if the changes are made to increase the efficiency of the business activities or to keep pace with developing technology, section IB 3(5) allows losses to carry forward if there is a genuine commercial reason for changing business activities or assets that are not related to the availability of losses. 

For details, please check with your accountant.

WHAT CHANGES CAN I STILL MAKE?

A company can still make changes whilst meeting the requirement of the business continuity test if the changes relate to:

• increase efficiency;
• respond to advances in technology;
• the scale of the business, including accessing different markets;
• product or service range (excluding land), if the new products or services both: a. use existing assets to produce; b. are related to the products and services already being produced.

Please note that the above does not constitute specific tax advice and only intends to be a general advice. If you require specific advice related to your situation, please reach out to our tax consultant using the ‘contact us’ option.

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