Carried-Forward Losses in Australia:
Opportunities and Obstacles for Corporations
By Christopher Garlick, Barrister-at-Law
International and Domestic Taxation Law
Introduction
In today’s uncertain economic climate, many Australian corporations are holding substantial carried-forward tax losses. These losses may result from genuine downturns in business, strategic restructures, or asset divestments. But a pivotal question remains: can these losses be accessed and utilised in future income years?
This article explores the legal framework and tax planning considerations for companies aiming to retain access to carried-forward losses, particularly where there are changes to ownership, directorship, or business operations.
The Two Core Tests: Continuity of Ownership and Same or Similar Business
The Income Tax Assessment Act 1997 (Cth) outlines two primary tests that determine whether a company can apply prior year losses to offset future income:
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Continuity of Ownership Test (COT) — Section 165-12
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Same or Similar Business Test — Section 165-13, as modified in 2020
If a company fails the COT — commonly due to more than 50% of shares changing hands during the loss period — it must satisfy the more complex same or similar business test.
Changing the Nature or Direction of the Business
The same or similar business test has evolved but remains highly nuanced. The ATO and courts consider several key factors:
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Nature of goods or services offered
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Customer base and market positioning
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Intellectual property, branding, and internal processes
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How revenue is generated
A business pivot — such as from brick-and-mortar retail to online sales, or from manufacturing to consultancy — could risk invalidating access to losses. Even where a company’s ACN and branding remain intact, a material change in operations may breach the test.
Key risk: Income from new activities may disqualify a company unless those activities are sufficiently linked to the original business.
Boardroom Changes: Directorship and Control
There is no statutory requirement that directors remain unchanged to access tax losses. However, directorship changes can indirectly jeopardise eligibility, particularly when:
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New directors are aligned with new shareholders (affecting the COT)
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Board changes reflect a shift in control or business strategy
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Functional breaks in business occur (e.g., shutdowns or re-staffing)
Courts look beyond formal roles to examine the effective control and timing of board changes — especially in combination with other business restructures.
Offshore Directors and Central Management
Relocation of directors offshore introduces further complexity. The central management and control test — clarified in Bywater Investments v FCT (2016) — emphasises where real decision-making occurs.
Even if a company is incorporated in Australia, it may lose residency status if effective control is exercised overseas. Consequences include:
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Ineligibility for Australian tax concessions
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ATO scrutiny over loss sheltering or artificial tax arrangements
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Exposure under transfer pricing and CFC provisions
With increased ATO focus on residency by substance, cross-border governance requires careful planning and documentation.
Strategic Planning and Practical Steps
To safeguard the use of carried-forward losses, companies should:
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Conduct loss integrity reviews before any ownership or structural changes
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Retain evidence that the business remains the same or similar
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Avoid board or shareholder changes without tax advice
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Seek private rulings or advance assurance from the ATO in complex cases
The preservation of losses must be weighed carefully against operational flexibility and strategic transformation.
Conclusion
Carried-forward losses can provide material tax advantages — but only if strict legislative conditions are met. In a climate of regulatory scrutiny and evolving business models, companies must tread carefully. With foresight and informed guidance, these latent tax assets can be preserved and leveraged effectively.