Government set to help SMEs with new tax loss carry back rule

The Government is expected to announce at next week’s Tax Forum business tax changes that will permit loss-making companies to claim back tax paid on the prior year’s taxable income.

The mooted change in the tax loss carry back option was recommended by the Henry tax review.

Shadow Small Business Minister Bruce Billson said while the Coalition was supportive of any measures that supported small business, it would need more detail before throwing its support behind the plan. During the global financial crisis, the Coalition called for a similar change, though its proposal was capped at $100,000.

Deepti Paton, tax counsel at the Tax Institute, says the change would be good news for the smaller end of town, but not a panacea.

“The timing seems very right to us, particularly in light of the current economic conditions,” Paton says.

“It will make a substantial difference for smaller businesses, but we hope it’s not the only thing. It’s certainly a start.”

Paton says the change would make cash flow for businesses starting out much more attractive.

“It will assist that end of town to the extent that businesses don’t have to keep funding their losses out of their own pocket,” Paton says.

Under the new proposal a business that makes a profit in year one and a loss in year two can claim that loss back. This compares with the current regime businesses have to make a profit in the future before being able to “use” their losses to reduce their tax.

According to Treasury figures from November 2009, a one-year carry back for revenue losses – with a maturity of 2020-21 – would have a $520 million impact on the 2011-12 budget, $440 million the year after and $380 million for 2013-14.

Peter Strong, executive director of the Council of Small Business of Australia, welcomed the news but said it should be apply to small business exclusively.

“I think it should only be for small business,” Strong says.

“The next step, of course, is how complicated it will be and we’ll be happy to talk with the Tax Office about that.

“There are enough small businesses that are making a loss and struggling, so this is welcome.”

Paul Drum, head of business and investment strategy at CPA Australia, says the idea is “appealing” for business, but presents some downside risks for the Government, given it has requested proposals for the Tax Forum to be revenue neutral and the plan might make planning for surpluses even more difficult.

“It will potentially undermine the revenue base, if not for an agreed period,” Drum says.

Drum says the change would likely come attached with certain conditions, such as in the UK where it was a one-off measure that has since been extended, or limited to certain sizes or losses.

“We also need a commencement date.”

The report flagging the change in the Australian Financial Review follows comments by Federal Treasurer Wayne Swan that people have raised the issue of the tax treatment of losses for the tax forum, which will be held next week in Canberra.

“Not being able to use tax losses can hit the very types of businesses that we often see struggling in today’s patchwork economy,” Swan said last week.

“Uncertainty about being unable to use legitimate tax deductions can discourage investment and sensible risk taking.”