Plan to let businesses “carry back” tax losses gains momentum, but high costs of policy could delay any move

The push to allow businesses to carry-back tax losses appears to be gaining momentum, with the Government’s Business Tax Working Group meeting today to look at whether new rules that would effectively allow companies to cash in losses should be targeted at SMEs.

In a statement released yesterday, Treasurer Wayne Swan said the Government was looking at “potential reforms to the tax treatment of losses as a way to encourage investment, particularly in struggling businesses”.

“By removing barriers to investment, the tax system can help provide businesses with a new lease of life.”

Swan added that the working group is looking at potential options and is scheduled to report back to him next month.

The working group, set up at the tax forum in October, has been tasked with “looking at reforms that can increase productivity and deliver tax relief to struggling businesses in our patchwork economy and develop a set of savings options within business tax, such as broadening the base and addressing loopholes or unnecessary concessions.”

An interim report it released last year canvassed three options for the treatment of tax losses:

• Introducing loss carry-back provisions that would allow businesses that have paid tax in past years to partly claw back those payments when they make a loss – which would help during difficult times.
• Indexing tax losses to inflation, in line with the bond rate for Infrastructure Australia projects.
• Reducing restrictions on businesses using tax losses, beyond the current policy covering a change of ownership or principal activity.

While the carry-back idea has widespread support, it seems unlikely the new rules would be put in place quickly.

According to the Australian Financial Review, allowing all companies to carry back losses, indexed to inflation, would be costly, given the $150 billion bank of corporate tax losses.

Deepti Paton, tax counsel at the Tax Institute, says any new ideas presented to the Government need to be revenue neutral – that is, any fall in government revenue would need to be offset by either higher taxes or a cut in concessions in another area.

But she says the carry-back plan would have widespread support.

“There are losses in the economy, from the top end of town down to micro businesses, and micro businesses are funding their losses out of their own pockets.”

A loss carry-back regime was recommended by the Henry Review. Tax experts have previously welcomed the idea, saying it would encourage more entrepreneurial activity and provide relief during difficult economic conditions.