Can a company carry forward tax losses with different shareholders?

Our rules used to be quite rigid when it came to a company’s ability to carry forward tax losses.  Broadly, the rules were designed such that those persons who indirectly bore the cost of the tax losses, could only enjoy the benefit of future use. 

This meant that tax losses carried forward by a company were forfeited if shareholder continuity was not maintained.  Shareholder continuity is measured by reference to voting interests and required that at least 49% of the shareholders of the day were still shareholders at the time the tax losses were utilised. 

These rules have now been somewhat relaxed, though with the relaxation there is also some subjectivity with their application. The rule is now similar to the Australian test; tax losses can carry forward, notwithstanding shareholder continuity has been compromised, providing the underlying business activity of the company has been maintained (a “same” or “similar” business test).   

The tax losses are now effectively pegged to the business, not the shareholder. These rules are referred to as the “business continuity test” (“BCT”). 


As above, a company may carry forward tax losses provided it maintains minimum shareholder continuity of 49% (i.e. this rule remains unchanged).  

However, if the 49% shareholder continuity threshold is breached, tax losses may now be carried forward if a company satisfies the BCT. The BCT test is applicable where the change in shareholding occurred in the 2021 (or later) income year.   

At a high level, the company must satisfy all of the following criteria to be permitted to carry forward tax losses under the BCT: 

  • The tax losses must not be older that the 2013–14 income year (any prior losses will be forfeited where 49% shareholder continuity is not maintained); 

  • The company must not have ceased to carry on business activities during the business continuity period (see below), i.e. the business must be trading; 

  • No major change in the nature of the business activities carried on by the company occurs during the business continuity period (other than a permitted major change, see below).  

In terms of the business continuity period, the same (or similar) business activity must be maintained for at least five years from the time of the shareholding change or when the tax losses are utilised (whichever is earlier).  

Permitted major change 

Naturally, following the sale of shares in a company, the new owners may make adjustments to the underlying business activity. It is therefore important to understand what changes can take place that satisfy the BCT. 

The new legislation does allow a company to make certain changes to their business operations and still meet the BCT criteria. These changes can include: 

  • Changes to increase the efficiency of a business activity carried on by the company; 

  • Changes to keep up to date with advances in technology; 

  • Changes arising from increasing the scale of the company’s business activities, including as a result of the company entering a new market for a product or service that it produces or provides; 

  • Change in the type of products or services the company produces or provides that involves the Company starting to produce or provide a product or service using the same, or mainly the same, assets as, or that is otherwise closely connected with, a product or service the Company produced or provided immediately before the beginning of the business continuity period; 

  • A company adopts a new strategy and ceases to supply a type of product or service and start producing or supplying another that has a close connection (for example, a restaurant operator switching to a cooking school); and 

  • A company adapts to be able to retain its existing product/service type but also add to it as opportunities arise, as long as there is a close connection (for example, a clothing manufacturer starting a range of commercial cleaning cloths using offcuts from the clothing). 

There is an additional anti-avoidance provision, which considers a major change in business prior to a breach of shareholder continuity. In short, the losses may not be permitted to be carried forward if there has been a major change to business operations within two years of the proposed introduction of the new shareholder (this is to prevent a prospective purchaser from approaching the vendor prior to sale to adjust the existing business to suit the purchaser).  


The obvious place to start is in the M&A space (whether the business is distressed or otherwise); tax losses now arguably have value for an incoming shareholder.  We recommend that negotiations consider this “asset” accordingly. 

We often see the old rules being a barrier to succession planning. This amendment provides a lot more flexibility and allows better commercial decisions to be made.   

In terms of considering the subjective elements of the test, as the rules are in their infancy (introduced in 2021) we have limited guidance and no case law to support how the rules will be applied (particularly where the business has changed post share transaction). However, given Australia’s regime has been in place for a number of years, and our rules are largely modelled on the Australian experience, Australian guidance will be useful in this regard. 

As a final comment, the BCT test is with respect to tax losses only.  Imputation credits have a similar shareholder continuity rule (this being 66% instead of 49%), however, the BCT does not extend to imputation credits. 

We question the fairness of this and do not understand why a similar rule could not be introduced for imputation credits. Australia’s franking regime (equivalent to our imputation credits) does not have any restrictions in terms of the carry forward of franking credits (i.e. shareholder changes can occur without any impact of the Company’s ability to attach franking credits).  

Talk to your local BDO adviser today to learn more about rules around tax losses.