To encourage innovation and growth among businesses, Australia plans to amend its loss tax rules. The Australian Treasury released a draft legislation seeking to reform the existing “same business test (SBT)” clause and to make it more flexible by adding a “similar business” test provision.

The Draft Bill amends the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936 .

The reform will improve companies’ access to previous losses in claiming a reduction for taxable income despite a changed ownership.

The consultation on the draft legislation closes on April 22.

According to sources, the reforms will “encourage entrepreneurship by allowing loss-making businesses to seek out new opportunities to return to profitability.”

The move is propelled by the National Innovation and Science Agenda of the Turnbull government for allowing companies to use tax losses from previous income years.

Under the current rules, a company can cite past year losses to claim a reduction in taxable income, provided it had the same majority ownership from the time the loss was verified under a “continuity of ownership test (COT).”

If the majority ownership changes, past year losses can still be accessed but the company must pass the SBT.

Under SBT, a company can use losses from past years to reduce taxable income if it had conducted business from the time the COT had failed until the time the latest loss was recorded.

Commenting on the draft legislation, Mark Molesworth, Tax Partner at BDO said some measures in the bill are a step in the right direction, but problems still remain, reports Tax News.

According to him, the existing same business test is restrictive and stifles innovation. However, the means by which the new law seeks to achieve this may increase compliance costs. Companies were facing constraints in entering new types of transactions or business activities.

In the new amendments, the government is trying to remove “no new transactions or business activities” aspect in the SBT to allow a company access past year losses, irrespective of it starting new business activities or new transaction types.

The ZD Net reports that the Turnbull government feels that the word ‘same’ in the old rule blocks business growth.

“The inability to utilize losses where a company has entered into new types of transactions or business activities inhibits a company’s ability to grow,” the government said in a statement.

It further noted that the old rules are discouraging companies which made losses in the past from seeking new investors or exploring profit-making activities fearing that they will lose access to past years’ losses.