Government unveils new loss carry-back tax break, but experts warn most small businesses not eligible

While tax experts have welcomed the Federal Government’s announcement that loss carry-back will be included in tomorrow’s Budget, they have warned that the reform as announced will provide little benefit for most small businesses.

Under the loss carry-back proposal, businesses will be able to claim losses of up to $1million against tax they have paid in the previous two years.

A business claiming the full amount would get a refund cheque of $300,000 — representing the company tax rate of 30c in the dollar.

Institute of Chartered Accountants tax counsel Yasser El-Ansary told SmartCompany that loss carry-back was a “compelling principle”, however, the implementation was limited.

“The principle of loss carry-back for business, especially small business is quite sound,” says El-Ansary.

“We do have an opportunity to modernise this particular aspect of our tax system and bring it into line with what other OECD countries are doing.

However, El-Ansary said the application of the reforms would be limited, as it was only applicable to businesses structured as corporations.

“It is not all beer and skittles in the way government would like business to be believe,” he says.

“This reform would only be available to businesses structured as companies, of the 2.8 million small businesses, only 20% are structured through corporate vehicles; the rest are partnerships, sole traders and trusts.

“Automatically, right from the outset, 80% of all small businesses are ineligible for access.

El-Ansary also warns that even if a small business was structured as a corporation, the likelihood of satisfying the other criteria for loss carry-back was narrow.

“You need to have a balance in your franking account, your tax paid account,” says El-Ansary.

“The likelihood that small businesses will find themselves in a position where they have made a profit for two years then a loss this year is quite slim.

“The reality is that small business doing it tough today have been doing it tough for four or five years.

“What we have said to the Treasurer and the Government is that it would make sense to not rush ahead with this policy. We want it designed in a way that maximises the likelihood that it delivers the right outcomes for business.

“Currently it will deliver none of the policy benefits they are looking for and will only benefit 110,000 businesses in a four year period; that is a drop in the ocean in the number of small businesses struggling.”

Tax Institute senior counsel Robert Jeremenko is also critical of some aspects of the proposed reform and warns that loss carry-back will have to be paid for somehow.

“In this budgetary environment no one should turn their noses up at something like this, but all along the Government said any changes like this have to be done in a revenue neutral way within the business tax system,” says Jeremenko.

“The big missing section in the Treasurer’s announcement was that there was nothing about how this will be paid for.”

The Government’s reform was initially recommended by the Business Tax Working Group in a 70-page report, which included two pages outlining proposals for how the scheme could be funded.

“The Business Tax Working Group was very clear in its report that it did not have time to do proper consultation on these measures,” says Jeremenko.

“We are concerned the Government will rush to adopt one of these savings measures that has not been properly thought through and analysed as to whether it is worth the trade off.”

Jeremenko says the proposed savings included revising the statutory effective life caps for the oil and gas industry, reforming deductions for exploration and prospecting, changes to research and development tax incentives and changes to financial capitalisation requirements to ensure multinational companies do not allocate too much debt to their Australian operations.

“These are breaks that your normal small business would not be getting,” Jeremenko acknowledges.

“However, they are all very complex issues and people need time to consider them.

“It is putting the cart before the horse to announce the reforms but not how to pay for them and did not necessarily provide a balanced announcement yesterday.

“While welcoming the change, we know there will be some medicine business will have to take.”

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