Tax experts concerned over exposure draft for loss carry-back scheme

Tax experts are still concerned over the Federal Government’s proposed loss carry-back provisions, saying integrity tests that would apply to companies making use of the scheme are too broad and complicated.

Those concerns have been amplified due to an exposure draft of the scheme, released yesterday by Treasury, which still include those provisions.

“It’s expensive, it’s difficult, and it’s complex,” says Deepti Paton, tax counsel at the Tax Institute.

“We’ve said so, the Henry Review said so, and the Business Tax Working Group has recommended the same-business test be reviewed and ultimately be rewritten.”

The new exposure draft states the loss carry-back scheme will come under existing integrity rules. Specifically, a company will not be able to take advantage of the benefit if they fail the “continuity of ownership” or “same business” tests.

But tax experts say this complicates matters.

The loss carry-back scheme allows businesses to claim a loss in the current year against tax paid on profits in the previous two years.

In July, Assistant Treasurer David Bradbury released a discussion paper saying the government will attempt to stop “loss trafficking”, which would stop directors from buying companies which already have losses in order to use those carry-back rules.

This is why it has included existing integrity measures – the same business test and continuity of ownership test.

“Specifically, a corporate tax entity cannot choose to carry-back an unutilised loss where it fails to satisfy the ‘continuity of ownership’ or ‘same business’ tests of Division 165 as modified for loss carry-back purposes,” it says.

The continuity of ownership test mandates that the same people must have maintained underlying beneficial ownership of more than 50% of all voting, dividend and capital rights in the test period.

For loss carry-back purposes, the continuity of ownership test is modified so the test period runs from the beginning of the year the loss is carried back to the end of the current year.

“This ensures symmetry between the operation of loss carry-forward and loss carry back, and that the rules apply identically across the test period for both loss carry-back and loss carry-forward.”

However, at that time tax experts spoke out against the inclusion of those tests, and they’ve continued that protest.

BDO head of tax Marcus Leonard says it would be a shame if the rules are too complicated and lock small businesses out of a potential benefit.

“You don’t want them too complex. If they’re overly complex, it will make them hard for businesses to understand.”

“However, this is still a year away, and it’s just a draft. There will be more discussion.”

Paton says the organisation would have thought existing provisions would be enough to cover any wrongdoing, and says it will lobby the government to commit to a broad review of the tests.

“We will still continue to speak to the government about a broad review and once we have, we think new rules should apply.”

 

 

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