Too little, too late: Experts slam tax working group’s recommendation to let small business offset tax paid against future losses

Tax experts have criticised the findings of the Government’s Business Tax Working group, saying the recommendation for businesses to offset tax paid previously on company profits against future losses will only help a minority of businesses and won’t actually provide much financial relief at all.

However, experts say the provision to change the “same-business” test is worth considering in order to encourage more innovation.

“There is no quick and simple solution here,” says CPA head of policy Paul Drum. “Our view is that many corporates would be underwhelmed at the prospect of a 2013-14 start date for this provision.”

“The promise that there may be a Government response in the Federal Budget is not going to fill people with excitement. If there is a response, it will be capped, and of little benefit.”

The business tax working group delivered its report on Friday, and recommended that loss-making small businesses should be able to deduct losses of up to $1 million from the previous two years. Businesses would be able to offset those losses against taxes they have paid.

”Australian businesses are under pressure to adapt and change their business models to overcome challenges and make the most of opportunities arising from structural changes underway within the economy,” the report said.

”Now more than ever it is important that the tax system does not get in the way of businesses wanting to invest and innovate.”

The provision is known as a “loss carry back”, and is designed to help businesses through tough economic times. Treasurer Wayne Swan has continually backed such a proposal.

But experts aren’t so convinced. Drum says the proposal doesn’t give any immediate relief, and it doesn’t help businesses that are still suffering fallout from the financial crisis.

“This doesn’t give relief for businesses that are under pressure. Cost of finance has gone up, many are looking down the barrel at a carbon tax, and the high Australian dollar is making it tougher for trade-exposed industries.”

“There is no immediate relief here.”

Drum also points out that most small businesses are unincorporated, which excludes them from any of the proposed benefits. This was the same criticism laid against the Government’s plan to slash the corporate tax rate to 29% for small businesses.

The Tax Institute has also said the working group should consider other approaches apart from the loss-carry-back system.

Drum also says the report seems to suggest the carry-back provision would be introduced in order to safeguard against any further economic downturn, not as any relief to previous downturns.

“Certainly the recommendations don’t provide an opportunity to get any relief from current conditions… the start date is even after the next election.”

However, Drum says the recommendation for the Government to amend the “same-business test” deserves more attention, saying the current rules punish businesses for expanding and diversifying.

“The same business test in particular too narrowly prescribes the range of activities that a company can engage in without risking forfeiture of its losses,” the report states.

The same-business test is a metric by which the Government can identify businesses eligible for certain deductions or bonuses. It mandates that a business applying for some sort of benefit needs to be essentially the same business it was during a previous point in time.

However, Drum point out that for many businesses, including manufacturing businesses, this can stop them from diversifying. A brewer, for instance, may expand into making labels or bottles, but this may put it in danger of breaking the same-business test.

“It just has to be fixed,” he says. “Changes are needed as the current structure impedes risk-taking and innovation. It encourages people to stay the same.”

The Tax Institute has also issued a negative response the report, saying it recommends the Government take further work to develop a model for reforming the same business test.

“Overall, it was not a great day for incorporated entities on Friday,” Drum says.