Tax working group proposes more ways for businesses to use tax losses, but experts wary

Taxation experts have welcomed a report detailing the main methods to improve the treatment of business tax losses, but caution that any change will need to be funded.

In an options paper released by the Business Tax Working Group this weekend, the advisory council 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.

The Business Tax Working Group ruled out refunding tax losses to companies, deeming it too risky for Government. It also found the current system discouraged risk-taking by immediately taxing profits but not calling on the Tax Office to share losses.

Treasurer Wayne Swan says improving the treatment of losses “could help businesses going through periods of losses, such as start-ups and infrastructure builders, as well as those businesses undergoing restructuring, in volatile industries or outside large corporate groups.”

But Robert Jeremeko, senior tax counsel at the Tax Institute, says the options paper only tells half the story.

“It doesn’t mention the elephant in the room, which is what businesses will have to give up,” Jeremenko says, noting the Government’s tight budgetary circumstances.

He says that by the time the report is finished in March, there’s going to be some serious offsetting required.

Jeremenko believes applying an uplift factor losses would be of benefit, but a lesser benefit than allowing a carryback of losses.

“Some combination would be ideal, which would just increase the cost of the measure.”

Beyond how the measures could be funded, Jeremeko says it’s important that any changes do not add another layer of complexity.

CPA Australia, meanwhile, has recommended the Business Tax Working Group:

• Review winding back accelerated depreciation for certain industries – not including the agricultural sector, in recognition of the growing importance of food security.
• Consider the reduction of the uplift factor on assets for companies who choose to consolidate under the tax consolidation regime.
• Consider reducing the debt/equity ratio to 2-to-1, from 3-to-1 in relation claiming interest deductions.
• Consider increasing the current five year black hole expenditure period to 10 years.

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.”

Beyond studying the tax treatment of business losses, in the longer term it will look at reducing the corporate tax rate or moving to a business expenditure tax system, particularly an allowance for corporate equity.

A loss carryback regime was recommended by the Henry Review, and tipped by Treasury two years ago to cost of $520 million. Tax experts have previously welcomed the idea, saying it would encourage more entrepreneurial activity and provide relief during difficult economic conditions.