Recouping Tax Losses for Innovation

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A draft law developed by the ATO is set to make changes to an existing ruling that will now cover innovation for companies. This new law will allow companies to recoup tax losses for carrying on a business against income derived from a similar business following a change in ownership or control, even if the business is significantly different because of innovative changes.

While there were previous laws that allowed this, they didn’t include innovation, so this is a real win for this sector!

Are you eligible?
There are four factors that will be taken into consideration in determining whether a company is eligible. These are as follows:

1. Use of asset
This looks at the extent to which the assets in question were used to generate income throughout the business continuity period. Were these assets used by the business. This will help determine if it is a similar business. In this context 'asset' can also include good will, but it can also relate to office premises, equipment and stationery.

2. Activities and operations
Are the activities being undertaken to generate the income the same as previously undertaken? They may be more efficient due to innovation improvements but is the basic function of the activities and the output of those activities the same? If they were producing widgets before are they still producing the same widgets now, even if they are an improved version of that widget.

3. Identity of the business
This compares the current identity of the business compared with the previous identity. Does the business have the same look and feel? Even if there are new activities being conducted, if the identity of the business remains the same it can indicate that the business remains relatively similar to that previously carried on.

4. Innovation or development of business
This looks at the extent to which the changes that have occurred were as a result of development or commercialisation of assets, products, processes, services or marketing of the business. These developments are designed to grow and enhance a business, and therefore don’t in themselves cause a business to be considered dissimilar. However, changes made to the business that did not result from innovation or development, then the business is less likely to meet the similar business test.

This is a win for the innovative business, and demonstrates a practical and sensible approach from the ATO. We want a tax office that supports innovation and encourages growth and change, these changes are the sorts of support that really demonstrate an investment in innovation. We find this really encouraging and fully support these proposed changes.

For more information see the full changes from the ATO site <https://www.ato.gov.au/law/view/document?DocID=COG/LCG20176/NAT/ATO/00001#P3> 

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About Author

Michael Derin
Michael Derin

Michael Derin, Azure Group's Group Managing Partner has over 25 years experience as a qualified Chartered Accountant within the business and commercial sectors. Michael works across our Technology, Corporate Advisory and CFO operations, managing highly complex projects to success.

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