This article discusses what the Commissioner views as carrying on a ‘similar business’. The new similar business test allows companies to encourage innovation and growth without losing the ability to access prior year losses.


Innovation companies generally accumulate tax losses in the early stages of their business cycle. During this phase, as new investors come on board and provide additional capital to fund growth, the companies may experience a change in ownership and control such that the tax losses will not be deductible in future tax years as they fail the continuity of ownership test (COT). Further, the business may have changed such that the losses also fail the alternative test, being the same business test (SBT).

Due to the difficulties faced by companies in satisfying the SBT, the Government introduced into Parliament the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 (Bill). The Bill provides for a ‘similar business test’ to supplement the existing ‘same business test’ for companies and certain trusts to allow them to utilise prior year losses following a change in ownership or control. This new ‘similar business test’ is a more flexible test and thus improves access to losses for entities that have changed ownership but at the same time would like to innovate and grow by engaging in new business activities and transactions that evolve from their business.

The ‘similar business test’ allows entities to innovate and experiment. Whilst such activities may result in a failure of the same business test, they may satisfy the similar business test and therefore entities may be eligible to access prior year tax losses.

To supplement the new law, the Commissioner of Taxation (Commissioner) has recently released draft Law Companion Guideline (LCG) 2017/D6 which provides guidance on what carrying on a ‘similar business’ means.

Commencement date

This new similar business test will apply for income years starting on or after 1 July 2015.

What is the meaning of carrying on a similar business

The test operates on the premise that the overall business of a company must satisfy the similar business test. The term ‘similar’ does not mean similar ‘kind’ or ‘type’ of business but rather, the identity of the business and the assets used in the derivation of assessable income in the former business, are the same as in the current business.

Though not limited to the following, the LCG lists four factors that must be taken into consideration when determining whether a business remains sufficiently similar. This requires a comparison between the essential characteristics of the business before and after the relevant change in ownership or control. These factors are:

  1. Assets – the extent to which the assets (including goodwill) that are used in the current business to generate assessable income were also used in the company’s former business to generate assessable income. Where the assets used are the same but the outcome or result is different due to innovative changes, this factor would indicate that the business remains similar to that previously carried on.
  2. Activities and operations – the extent to which the current activities and operations of the current business were also the activities and operations from which the former business generated assessable income.
  3. Identity – where the new activities of the current business does not change the identity of the business from that of the former business.
  4. Changes – the extent to which any changes to the former business as a result of  development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business.

The similar business test is being introduced as part of the Government’s National Innovation and Science Agenda announced on 7 December 2015. It will encourage businesses to innovate without being hindered from utilising prior year losses. However, it is important to note that where there are changes to the business that are not a result of innovation or development, the business is less likely to satisfy the similar business test.

If you are unsure if your company satisfies the Similar Business Test please contact us to learn more.