Reform of tax losses – submission to Business Tax Working Group

On 3 February 2012 the Institute lodged a submission regarding the Business Tax Working Group’s (BTWG) interim report on the tax treatment of losses.

Given the magnitude of the issues contained in this interim report the Institute is concerned that vital information regarding the proposals has not been released and that the consultation process has been constrained by occurring during the Christmas/New Year break, when many people are on holidays.

The Institute is also concerned that in just over a month, the BTWG is required to consider all submissions, conduct and analyse costing scenarios and devise final recommendations without any further consultation.

The importance of maintaining a revenue neutral package is recognised by the Institute. However, in the absence of details regarding the magnitude of the costing associated with each of the tax loss proposals and the lack of detail regarding possible revenue raising measures to counter potential revenue losses, it is difficult to provide a definitive view regarding the direction and priorities that the tax loss proposals should take. To enable more meaningful consultation, we encourage the BTWG to release and allow consultation to occur regarding:

  • Details of how tax losses are currently allocated between years, types of losses, business sizes and industries
  • The costing of each tax loss proposal (along with an explanation of how they were compiled and their assumptions – for example, does the costing take into account possible offsetting revenue from the economic efficiencies of the proposal)
  • Details regarding possible revenue raising measures that are being considered to offset the cost of the tax loss proposals.

The proposals regarding the tax treatment of losses alter a significant part of the tax system, and may improve Australia’s productivity. However, there are also alternative mechanisms that can be used to improve Australia’s productivity through the tax system. The Institute believes that the following options are deserving of further consideration by the BTWG as mechanisms to encourage the development of businesses:

  • Reducing the corporate tax rate which could be funded by the reduction in the number of business tax concessions and/or 
  • Allowing small businesses the ability to have an entity flow through tax regime – this would substantially simplify the tax system and provide benefits to those organisations that most need assistance with restructuring their businesses to meet the challenges and opportunities of an Asian century.

Given the lack of information concerning the cost of the proposals and the possible methods of offsetting the cost, the Institute cannot provide a firm view regarding the desirability of the loss proposals. Subject to being provided with greater information concerning the cost and impact of the loss proposal and the associated revenue raising measures, the Institute does have the following comments regarding the tax loss proposals: 

  • Loss refundability – The Institute agrees that this option should not be pursued due to its expected high cost to revenue 
  • Removal of the existing continuity of ownership test (COT) and the existing same business test (SBT) and replacing them with an alternative integrity test – This is worth exploring further provided that there are also simplifications made to the existing tax loss rules for existing tax losses 
  • Loss carry back – In the medium term, further analysis of the merits of a limited loss carry back regime for small business should be carried out 
  • Loss uplift – subject to obtaining further details of the costing, it is the Institute’s view that it is unlikely that, for most taxpayers, the benefits of providing loss uplift will substantially exceed the associated compliance costs. Accordingly the Institute does not recommend proceeding with this approach 
  • The only combination of measures that may be worth pursuing is the removal of COT and SBT and the allowance of a loss carry back 
  • The BTWG should consider closer alignment of the rules for the treatment of revenue and capital losses 
  • Type of entity - The interim report is concerned only with company tax losses. Ideally the type of entity in which business is conducted should not affect the treatment of losses. Accordingly the Institute recommends that the BTWG takes into account the current reviews of trusts and small business taxation with a view to ensuring that there is not a significant dichotomy of treatment based on entity alone 
  • Black hole provisions – the Institute encourages the BTWG to further explore the possibility of writing off black hole expenditure (other than expenditure related to shut down) over a shorter period of time.

Article last Updated 13 February 2012