Our current rules are amongst the most stringent in the world, and we recognise that in this extraordinary time, businesses may need to raise additional capital to remain afloat.
The in-principle announcement gives taxpayers raising capital a level of certainty to undertake these transactions, while also giving officials time to work through the detailed design of rules that can be included in a bill in the second half of 2020. The Government intends passing legislation before the end of March 2021, and for it to apply to the 2020/21 and later income years.
Introducing a ‘same or similar business’ test
Currently, if a company has more than a 51% change in ownership it cannot keep its tax losses. Introducing a ‘same or similar business’ test means a business could carry forward losses. To meet the test, the business must continue in the same or a similar way it did before ownership changed. This test is modelled on Australia’s rules.
Some companies will be looking to raise capital to keep afloat now and to recover in the future. Raising capital may result in a change to the existing shareholder structure. Relaxing the rules will ensure companies in this position could carry losses forward to offset income when they return to profit. Being able to carry forward losses makes the business more valuable to investors. The rules should improve access to capital for businesses.
We understand that some businesses and investors will want to know now if the proposed changes will apply to them, however we need to take time to work with the tax community to make the law clear. There will be public consultation on the proposed changes in the second half of 2020. It is important the law changes prevent loss trading.