Last Friday federal minister for revenue and assistant treasurer, Mal Brough, released exposure draft legislation aimed to simplify the tax loss legislation.

“On the one hand, the announcement is welcomed because it will make it easier for businesses to comply with the rules on tax loss recoupment," lane said.

"But for large business the government has also axed (albeit prospectively) the alternate regime to claim loss deductions.

“The simplification of the loss recoupment rules is long overdue and a sensible response to the complexities of today’s capital markets. But corporate Australia might not appreciate how simplified the tax regime will now become."

Lane said a more 'compliance-friendly' version of the Continuity of Ownership Test (COT) had emerged, but the trade-off for large business is the abolition of the Same Business Test (SBT) for losses incurred in income years after 2005. These changes not only affect revenue losses but also net capital losses and deductions for bad debts.

“Organisations most affected will be those with large upfront costs with deferred revenue streams such as in the resources or infrastructure sectors," he said.

"But all businesses with a turnover in excess of $100m per year will most likely be impacted by these proposals. Future sell down of their investment risk may result in carry forward tax losses being lost even though the same business is being carried on.”

The proposals will also affect mergers and takeovers as well as tax consolidation groups.

Impact on M&As

Head of mergers and acquisitions in KPMG’s corporate finance practice, Antony Cohen said with the current wave of mergers and acquisitions as well as a hearty appetite for IPOs in the market, shareholders and senior management needed to appreciate how these proposals would affect valuations when looking at a change in ownership.

“As a merger involves a change in ownership, the inability to rely on the Same Business Test to claim these inherited tax losses as deductions may well impact the future dynamics of Australian M&A activity,” said Cohen.

Impact on tax consolidation

KPMG tax partner, Peter Murray, said while the simplified COT proposal should make it easier for companies to comply with the loss recoupment rules, the future SBT proposals would have several side-effects.

For example mid-size companies with losses could lose the SBT option once they join a large consolidated group, and a consolidated group seeking to undertake a merger through scrip bid could worsen its own tax loss profile even though there were no losses in the target.