Tax loss

Question 1

Why must there be restriction on carry forward of corporate tax losses

Answer 1

Without these safe guards the loss companies would be sort out after profit companies to reduce their overall tax liability

Question 2

When can a company claim a deduction for their tax loss

Answer 2

Comapnies can onyl claim deduction for their tax loss if they

Satisfy a “continuity of ownership” COT tests

Pass a same business test SBT

Even if these test are satisfied, specific anti-avoidance provision in Div 175 may apply

Question 3

Explain how the COT works

Answer 3

The continunity of ownership test broadly is fulfilled. If at all times during the “ownership test period”, the same persons beneficially owned either directly or indirectly 50% share in the company

You must determine if they have benefiticial ownership in each year until the period in which the business changed

o Rights to more than 50% of the voting power in the company
o Rights to more than 50% of the company’s dividends, and
o Rights to more than 50% of the company’s capital distributions

Question 4

Expalin how the primary and secondary test works

Answer 4

The continuity of ownership test requires that a company satisfy either the primary test or alternative test

Primary test: This test is used unless one or more companies own shares/ interests in shares in the company during the test period

Alternative test: This test is used when the primary test is not applicable. Companies that are interposed, need to trace back interest

Question 5

1. Explain the same business test

2. What are the relevant cases

Answer 5

1. A company does not satisfy the same business test if it enters into a business or transaction that it did not carry on before the same business test

Same business test (SBT) requires a company to carry on the “the same business” as it did before the “test time”

SBT is failed if during the “same business test period” the company derives assessable income from

• a business of a kind that it did not carry on before the test time
• A transaction of a kind that it had not entered into in the course of its business operation before the test time

2. “same business” means “identical business” rather than merely the “same kind of business” (Avondale Motors 1971)

Mere fact that changes have occurred in the way is carried on after change in ownership will not necessarily result in the business being a different business (Lilyvale Hotel 2009)