New business continuity test – Inland Revenue releases guidance

Tax Alert - June 2021

By Campbell Rose, Vyshi Hariharan and Himo Salgado

Inland Revenue has issued guidance on how the main aspects of the recently enacted business continuity test (the BCT) will apply, in the form of draft interpretation statement - Loss carry-forward – continuity of business activities (Draft IS). The Draft IS provides valuable detail about how Inland Revenue sees the BCT operating in practice, including guidance on the meaning of various elements of the BCT, as well as the quantitative and qualitative factors to be considered when applying the test.

In this article we have briefly commented on the key areas covered by the Draft IS, and have included observations on other aspects that could usefully be addressed once the Draft IS is finalised.

What is the Business Continuity Test?

The BCT supplements the existing shareholder continuity tax loss carry forward rules with a new “major change” test. It allows losses to be carried forward to future years unless there has been a major change in the nature of business activities carried on, subject to meeting certain requirements. In most cases, taxpayers are required to assess whether there has been a major change from immediately prior to a breach in shareholder continuity, until the earlier of (a) all losses being used, and (b) the last day of the income year in which the fifth anniversary of the breach in continuity occurs.

How to describe the nature of a company’s business activities?

A crucial first step in applying the BCT is establishing the nature of the company’s business activities carried on. This sets the scene for any subsequent analysis of whether there has been a “major change” to the nature of those business activities within the prescribed period.

The Draft IS explains the meaning of “nature” and “business activities”. It notes that ‘the rule is concerned with the basic or inherent features, qualities, or character of the company’s business activities’; with “business activities” meaning ‘any action taken in the pursuit of one or more businesses that the company may carry on for income tax purposes’.

An obvious challenge here is that there are differing levels of granularity which can be used to describe the nature of a company’s business activities. The Draft IS also helpfully addresses this, outlining the following three levels (noting that description 2 below is the level of granularity Inland Revenue considers to be appropriate):

  1. Very broadly (e.g. Agriculture, manufacturing, construction, retail, or professional services)
  2. More narrowly (e.g. sheep farming, clothing manufacturing, house construction, book retailing, or architectural services)
  3. Very narrowly (e.g. merino sheep farming for fine wool, hosiery manufacturing, kitset house construction, children’s book retailing, or residential architecture).

What is a major change?

Whether a change in the nature of business activities is a major change requires consideration of how significant the change is in the context of the operations of a company. The Draft IS outlines the relevant quantitative and qualitative factors to be considered as part of this analysis.

The extent to which the assets used in deriving the company’s assessable income have remained the same or similar over the continuity period is one factor that must be taken into account in determining whether a major change has occurred. The Draft IS provides a useful interpretation of “assets”, usually being those recorded in a statement of financial position, but noting that internally generated goodwill, brands, customer lists and early-stage intangibles should also in appropriate businesses be included in the analysis (but not people, generic business processes or generic know-how). The Draft IS also observes that the most appropriate way of assessing changes in assets depends on the context (e.g. number/different type of asset, area/floorspace and value – noting this could be at historic cost, book value, replacement value or market value as appropriate to avoid distortionary results).

Is a major change a permitted major change?

A company will be able to carry forward tax losses despite a major change, if the major change is a “permitted” major change. In this regard the Draft IS notes that, depending on the facts, it may be easier to first consider whether a change is a permitted major change – as opposed to analysing whether the change itself is major. The parameters of “permitted” major changes appear, in some cases, to be less complex to evaluate – so this observation from Inland Revenue is helpful in endorsing what is effectively a short-cut in the BCT analysis.

The Draft IS provides enlightening practical examples for each category of the permitted major changes, outlining various measures that should be considered for each carve-out.

One of the permitted major change carve-outs is satisfied where the “same, or mainly the same” assets are used to produce or provide a new type of product or service. When considering the meaning of “mainly”, the Draft IS notes that, ‘on balance it is considered that an interpretation that equates (in numerical terms) to approximately 75% is appropriate’ in the context of the BCT. However, as stated in the Draft IS and as noted above, there are a number of ways that assets can be measured and the approach to be taken will depend on the context.


A tax loss cannot be carried forward if, before the beginning of the prescribed period, the business activities of the company have ceased and not been revived; or if the company ceases to carry on business activities during the prescribed period.

The Draft IS discusses the difference between “temporary cessation of business” and “cessation with the possibility of recommencement”, noting that a temporary cessation will not constitute a cessation of business activities for the purposes of the BCT, whilst a cessation with the possibility of recommencement will constitute a cessation.

Matters not addressed in the Draft IS

The Draft IS contains a brief statement regarding the application of the BCT to groups of companies – namely that companies forming part of the same group immediately before and immediately after an ownership breach occurs (for each of the companies) are treated as a single company for the purposes of the BCT.

The analysis underlying the application of the BCT to groups of companies can be complex. We hope that Inland Revenue will include further guidance and practical examples in the finalised statement, as it is a common scenario to have a group of companies (comprising the same/similar, or quite different businesses) acquire a target business. It would be helpful to address a scenario where the acquiring group itself is relying on the BCT.

Practically, major changes are unlikely to align perfectly with balance dates, and are more likely to occur part way through an income year. The Draft IS does not include any discussion (or examples) which provide guidance on the approach to be taken in a part-year scenario. Inland Revenue should include further guidance and practical examples in the finalised statement, including illustration of how the part-year rules will apply in a BCT context.

The Draft IS does not consider the targeted anti-avoidance provisions which were introduced as part of the BCT. Broadly, these are aimed at dormant companies, and include anti-injection/anti cost-shifting rules similar to what is included in the Australian regime. The measures seek to prevent loss trading, including by ensuring that income cannot be diverted into an acquired loss company to utilise losses quicker than would otherwise the case; and that expenses cannot be transferred out to another group member for no charge (again, to use up losses more quickly). Inland Revenue have noted that ‘due to the significant overlap with the current revision of the s BG 1 interpretation statement’ the Draft IS does not comment on these provisions. We understand that separate guidance will be issued by Inland Revenue in relation to these targeted anti-avoidance provisions in due course. In the interim, taxpayers should ensure they appropriately consider the anti-avoidance provisions, as they are a critical part of ensuring compliance with the BCT. We are not so sure that the overlap is as significant as Inland Revenue suggests given the targeted nature of the measures, but in the meantime taxpayers can refer to the commentary released when the BCT was enacted for guidance. For completeness it would seem sensible to at least include the specific anti-avoidance rules in the appendix, so that the new BCT legislation in its entirety is located within the Draft IS for readers’ convenience.

Finally, it would be helpful to understand whether there will be any limitations on what aspect(s) of the BCT Inland Revenue will rule upon – as securing certainty in relation to application of the BCT in a capital-raising, innovation/pivot, M&A or other relevant context will be critical.

Submissions on the Draft IS close on 28 June 2021. If you would like to make a submission or to understand the impact of the BCT rules in more detail, please get in touch with your usual Deloitte advisor.

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