Loss Carried Forward – PUB00376

The new loss carry forward rules are contained in s IB3 of ITA07. The new rules provide that a tax loss may be carried forward from the 2020/21 income year, despite an ownership continuity breach, provided that there is no major change in the nature of the business activities carried on by the company, during the business continuity period, unless the change is a permitted major change.

The business continuity period is typically the period starting immediately before the ownership continuity breach and ending on the earlier of:

The last day of the income year in which the tax loss component in question is used; and
The last day the income year in which the fifth anniversary of the ownership continuity breach falls.

The main rule in s IB3(2)( c) focuses on the nature of the business activities carried on by the company and whether or not there was a change in the company’s business activities. The Company business activities should be described by reference to:

Its core business processes (e.g. farming, manufacturing, development, construction, distribution, retailing services);
The type of products or services produced or provided;
Significant assets utilised (e/g premises plant, machinery, livestock, intellectual property, goodwill);
Where relevant, significant/suppliers or other inputs (i.e. Key staff);
Scale (e.g. approximate turnover and size); and
The main markets supplied to (retail/ wholesale/ national/ specific territories)

Whether there has been a major change requires consideration of all the facts of each case. The change will be major if it is of greater importance when comparing the nature of the company’s business activities before and after the ownership continuity breach. The extent to which relevant assets used in deriving the company’s income have remained the same or similar over the continuity period also needs to be taken into account when determining whether a change has occurred. In most cases the assets recorded in the statement of financial position will be the relevant assets. However in some cases, depending on particular circumstances, other assets may also be taken into account , such as internally generated goodwill, brands, customer lists and early stage intangibles.

The assets of a company may need to be replaced due to wear & tear , obsolescence or to keep up with new improvements. Provided that the replacement assets are of the same character as the assets they are replacing (i.e. perform the same function) and are simillar in size and number , the change in those assets will not be taken into account when assessing whether there has been a major change.

If there has been a major change in the business activities , the business continuity test may still be satisfied if the major change is a permitted major change. There are four permitted major changes:

Those made to increase the efficiency of the business activity ;
Made to keep up to date with advances in technology relating to a business activity;
Caused by an increase in the scale of a business activity; and
Caused by a change in the type of products or services produced or provided

Tax losses incurred prior to 2013/14 income tax year cannot be carried forward under the new Business continuity method. These losses can only be carried forward under the Ownership Continuity test.

Furthermore if a company ceases to carry on its activities during the continuity period, it cannot carry forward losses.

The deadline for comments is 1^st September 2022

August 2022