Can Your Company Carry Forward Tax Losses After an Offshore Restructure?

Introduction

Accumulated tax losses are a valuable asset, yet an offshore restructure can wipe them out without warning when it changes who directly holds your company’s shares or rights. The tension is that a step taken for other reasons can quietly put the continuity of ownership test at risk, even where the ultimate owner stays the same.

This article explains how an offshore restructure puts carried-forward losses at risk, how the business continuity test operates as a fallback, and which restructuring steps most commonly trigger the loss rules.

Interactive Tool: See If Your Carried-Forward Tax Losses Are Still Available

Why an Offshore Restructure Can Put Tax Losses at Risk

The Value of Accumulated Tax Losses for a Company

Accumulated company losses can reduce future taxable income once the business becomes profitable. They remain within the company, rather than being distributed to shareholders, and can generally be carried forward indefinitely under the company loss rules.

That benefit is conditional. Under Section 165-10 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’), a company must satisfy either:

• the continuity of ownership test; or
• the business continuity test before applying an earlier tax loss.

For Australian business owners, the risk is that the restructure is assessed as a shareholding or control change only after the loss has already been treated as available.

How Restructuring Triggers the Loss Integrity Rules

An offshore restructure can change who directly owns or controls an Australian company, even where the same individual remains the ultimate beneficial owner. That change can place the carried-forward loss under the continuity of ownership test, which examines ownership of voting, dividend, and capital rights across the relevant ownership test period.

If the continuity of ownership test is not satisfied, the company must rely on the business continuity test to use the loss. A failure of the relevant tests can remove the deduction, producing:

• an amended assessment;
• penalties; and
• a general interest charge where the loss was claimed incorrectly.

The loss intended to support future tax outcomes can therefore disappear as a consequence of a structural change that was designed for another purpose.

How Australian Tax Losses Work & What Allows Them to Carry Forward

The Continuity of Ownership Test Threshold

An offshore restructure can affect the tax loss position even where the commercial owner appears unchanged. For Australian business owners, the Continuity of Ownership Test (COT) requires the same persons to hold more than 50% of the voting, dividend, and capital rights throughout the ownership test period. A change in direct share ownership, or in any of those rights, does not automatically break the test, but the test must be applied to the new structure even where the ultimate beneficial owner is unchanged.

Under Section 165-12 of the ITAA 1997, this test is applied across the ownership test period. That period begins at the start of the income year in which the tax loss arose and ends at the end of the income year in which the company seeks to use it. As a result, a later ownership change can affect an earlier company loss.

The Application of the Business Continuity Test

When the COT cannot be met, the business continuity test can provide an alternative if the company continues the relevant business. The business continuity test is the umbrella term covering:

• the same business test under Section 165-210 of the ITAA 1997; and
• the similar business test for eligible losses.

The same business test focuses on whether the company continues its business as a whole without deriving income from a new kind of business or transaction. The similar business test, addressed in Law Companion Ruling LCR 2019/1 (‘LCR 2019/1’), permits new activities that evolve from the existing business. However, the overall business identity, activities, and use of assets must remain sufficiently similar; otherwise, the tax loss can be unavailable after the ownership change.

How Capital Losses Are Treated Under the Rules

An offshore restructure can place capital losses at risk on the same basis as revenue tax losses. Under Section 165-93 of the ITAA 1997, the same COT and business continuity test conditions apply when a company seeks to use a net capital loss against later capital gains.

A company holding significant unrealised or accumulated capital losses remains exposed if the ownership test fails and the business continuity test cannot be satisfied.

The Restructuring Changes That Most Commonly Trigger the Loss Rules

Transferring Shares to an Offshore Holding Company

Moving shares in an Australian company to an offshore holding company changes the direct shareholder. This does not automatically mean the losses are lost; the relevant ownership tests still need to be applied.

For Australian business owners, the practical question is whether the new ownership chain preserves the required voting, dividend and capital rights. That needs to be established before the restructure is implemented.

Changing Share Rights in the Australian Company

Issuing new share classes can change the rights attached to shares without changing the names of the shareholders. The affected rights may include:

• voting power;
• dividend entitlements; or
• rights to distributions of capital.

Practically, this matters for Australian business owners because the COT looks at voting, dividend, and capital rights, not just who is named on the share register. Section 165-165 of the ITAA 1997 also limits the calculation to the same shares held by the same persons, so altered rights can place carried-forward company losses at risk even where the shareholders’ names do not change.

What the Business Continuity Test Can & Cannot Save

The Annual Application of the Business Continuity Test

An Australian company cannot treat the business continuity test as a one-time pass after an ownership change. The business continuity test must be satisfied each year the company wants to apply the losses. A company that passes the test in the year of the ownership change must continue carrying on the same or similar business in every later year it wants to use those losses.

Practically, this matters for Australian business owners because a company may qualify to use a tax loss in one year, then lose access in a later year after changing its business activities. The business continuity test operates through the same business test and the similar business test described earlier.

The Limits of the Business Continuity Test During a Restructure

The business continuity test may not preserve company losses if the company no longer carries on the same or a sufficiently similar business. Moving the operating activity offshore and becoming a passive holding company therefore requires assessment.

Practically, this matters for business owners when an Australian company stops conducting its operating business, retains investments or shares, and seeks to apply earlier tax losses against later income. The company may still exist legally, but that does not mean it continues the same or similar business for the business continuity test.

Case Study on Changing the Identity of the Business

The ATO’s hypothetical Mad Cow Ltd example shows how a complete change in business identity can prevent losses from being saved. After the majority shareholder sold shares, Mad Cow Ltd changed from the “MuBurger” fast food business to “Healthy Food Artists”, with a new brand, logo, restaurant layout, manager, marketing approach, menu, and premium family-restaurant positioning.

Under Paragraph 29 of LCR 2019/1, Mad Cow Ltd failed the similar business test because the change was not an evolution of the former business. The company no longer generated income from the “MuBurger” brand, its identity had changed, and the new activities did not result from developing or commercialising the earlier business, so the carried-forward losses could not be used.

What to Check Before Any Offshore Restructure Is Implemented

Assessing the Value of Carried-Forward Losses

An offshore restructure should not proceed until the company’s carried-forward tax loss position has been reconciled. The records should confirm that the loss amount matches the figures lodged with the Australian Taxation Office (‘ATO’), including any amendments or adjustments from earlier reviews.

The relevant evidence includes:

• Loss calculation workpapers supporting how the company loss was calculated.
• Tax returns and loss schedules showing when each loss arose.
• Records of earlier amendments or audits affecting the amount available.

A discrepancy can leave the company claiming a tax loss that does not match its lodged position, weakening the basis for using that loss after the restructure.

Evaluating the Impact on Ownership & Control

The proposed restructure needs to be tested against the COT before any ownership or control change occurs.

Practically, this matters for Australian business owners when a COT failure requires reliance on the business continuity test, which covers the same business test and the similar business test described earlier. If the restructure changes the company’s business identity or shifts its operating activity offshore, the fallback may not preserve access to the company losses.

Sequencing the Restructure to Preserve Losses

Loss preservation needs to be assessed at the beginning of international offshore company structure design, not after the ownership structure has been settled. The order of the proposed transactions can affect whether the company maintains the required ownership position or must rely on the business continuity test.

The review should compare each proposed change against:

• Share ownership: whether a new direct owner is inserted.
• Share rights: whether voting, dividend, or capital entitlements change.
• Business activity: whether the Australian company continues the same or similar business.

If these issues are left until after implementation, the company may discover that an offshore restructure has removed access to accumulated company losses that the business expected to use against future taxable income, in which case an offshore compliance review and structure remediation may be appropriate.

Conclusion

Carried-forward tax losses are valuable company assets, but an offshore restructure can put them at risk by changing direct ownership, control, or share rights. Section 165-12 of the ITAA 1997 applies the COT, while the business continuity test may provide an alternative only where the company continues the same or similar business; Section 165-93 applies these conditions to capital losses as well.

Australian business owners considering structural changes should seek tailored advice from WealthSafe’s international offshore company structure design specialists before implementation. WealthSafe helps assess whether the proposed structure preserves available losses, reflects the company’s real business, & remains legally defensible.

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