Background
Effective year of assessment 2019, unabsorbed adjusted business losses can carry forward for a period of 7 years consecutive years of assessment. In 2022 the time limit for unabsorbed adjusted business losses carry forward has change the year of assessment of 10 years consecutive years of assessment.
Shareholding
Unabsorbed adjusted losses or the sum of the adjusted losses from each of the companies carried forward are only permitted to be absorbed in the year of assessment and subsequent years of assessment if the shareholders of the company are basically the same, or in other words, if there has not been a significant change in the company’s shareholding. This is according to Section 44(5A) of the ITA.
The unabsorbed adjusted business losses or aggregate adjust business losses are not allowed to be absorbed in that year of assessment and must be ignored if there is a significant change in the company’s shareholding during the assessment year. The amount ignored will not be eligible for a deduction in following assessment years.
The shareholders of the company are significantly the same if they were significantly the same on the relevant date, which is the last day of the basis period for the relevant year of assessment in which the amount of adjusted business losses is determined, and on the first day of the basis period for the relevant year of assessment in which the adjusted business losses are allowable as a deduction:
More than 50% of the paid-up capital in respect of the ordinary share of the company is held by or on behalf of the same person.
More than 50% of the nominal value if the allotted shares in respect of ordinary shares in the company is held by or on behalf of the same pages.
What happen if there is substantial charge in SHH?
In a nutshell, where the shareholding of a company was changed substantially during a basis period, any unabsorbed loss and capital allowance brought forward were disregarded.
This provision has been somewhat suspended or deferred as it has been confirmed by the tax authorities that these rules are only applicable in the case of a substantial change of shareholding in dormant companies. As such, these provisions are not discussed any further here.
A company is considered dormant if there is no significant accounting transaction in one financial year prior to the substantial change in its equity shareholding. This means there is no entry registered in the company’s account other than the minimum expenditure needed to fulfil specified statutory requirements. The minimum expenditure allows are:
a. Filling fees for Annual Return (AR)
b. Secretarial fee for filing AR
c. Tax filing fee
d. Audit fee
e. Accounting fee