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More scope for passing the Business Continuity Test
Tax Losses can sometimes now be retained following a change of ownership. The Government introduced this change as previously what’s known as the ‘Business Continuity Test’ created an impediment for businesses obtaining capital in order to innovate and grow. This was due to a breach of the 49% ownership continuity threshold. The Government wanted to address this impediment, with a particular focus on start-ups and small-medium enterprises. It increased the scope of the test in 2021.
What is the “business continuity test”?
If you oversee your business’s tax affairs, you will have heard about the “business continuity test”. If the test is satisfied, a company can carry forward any losses from preceding income years into subsequent income years, even if the shareholding of that company has changed during that period. This informs people’s decisions over whether to buy and sell shares and when to do so.
How has it changed?
The test, however, has recently evolved, making it easier to carry those tax losses forward. Formerly, a company was required to retain shareholder (owner) continuity of at least 49% (or conversely, not change more than 51% of its shareholding) to pass the business continuity test. If it breached this threshold (i.e. by changing more than 51% of its shareholding), it could not carry forward tax losses.
However, this test has been supplemented and now also enables a company that has changed more than 51% of its shareholding from the 2020/21 income years to carry forward tax losses generated from the 2013/14 income year onwards, provided the company meets certain “business continuity” requirements.
What requirements are there?
The key requirement is that there is not a “major change” in the business activities of the company within 5 years after the change in ownership. Whether something is a “major change” is subjective and largely depends on the circumstances. According to guidance published by the IRD, things that a business can change after the acquisition and still pass the business continuity test include changes to:
increase the business’s efficiency;
respond to advances in technology
the scale of the business, including accessing different markets;
the business’s product or service range (excluding land), by either:
withdrawing unprofitable products or services; or
adding new products and services.
There are also some exceptions – for example, certain finance company losses are treated differently and mineral mining companies cannot use the business continuity test.
If you are buying or selling more than 51% of shares in a company that holds tax losses, we can help you to explore your options in terms of the business continuity test. Contact Anthony Kuran on 09 306 0611 or @email or Andrew Knight on 09 985 2531 or @email