Abandoning a reduction in the company tax rate and introduction of tax loss carry-back

Budget Review 2012–13 Index

Kai Swoboda

A significant change to expected business taxation arrangements in the 2012–13 Budget was the abandonment of a general reduction in the company tax rate from 30 per cent to 29 per cent in 2013–14 (and from 2012–13 for small businesses). The Government’s rationale for not proceeding with the proposed company tax rate cut was that the likely rejection of the proposal in the Parliament by the Coalition and Australian Greens would deny the community the benefits flowing from the resources boom and that savings available from not proceeding with the company tax rate cut could be redirected through other measures.[1]

Partly to address business concerns about abandoning the company tax rate cut,[2] the Government has instead proposed a limited form of tax refund from tax paid in prior years to offset a tax loss—so called ‘loss carry-back’.[3] The views of the business sector are generally consistent with those of the Australian Chamber of Commerce and Industry—which has criticised the Government for abandoning the company tax cut given that the quid pro quo mining tax had already been legislated and for a lack of vision in pursuing broader-based tax reform but expressed general support for the tax loss carry-back scheme.[4] The Coalition, whilst not supporting the reduction in the company tax rate on the basis that it is linked to the minerals resource rent tax, have nevertheless been critical of the abandonment of the company tax rate cut, citing it as another instance where a commitment has been dumped.[5]

What is loss carry-back and what are the key eligibility and thresholds for the proposed scheme?

Current company tax arrangements provide that nominal tax losses can be carried forward indefinitely subject to some integrity rules. However, there are no provisions that provide for companies which have previously made profits to claim back the tax paid. This refunding of previous tax paid when a loss is incurred is described as ‘loss carry-back’ and corrects the existing asymmetry where only previous losses are allowed to be carried forward and offset against future profits.

As announced by the Government, a limited form of loss carry-back will be implemented which provides for:

  • eligibility to be restricted to entities that are taxed like companies and be limited to revenue losses only
  • a one‑year loss carry-back will apply in 2012–13, where tax losses incurred in that year can be carried back and offset against tax paid in 2011–12
  • for 2013–14 and later years, tax losses can be carried back and offset against tax paid up to two years earlier
  • the maximum carry-back of previous tax losses in a year will be $1 million or a company’s franking account balance (whichever is lower)—providing for a maximum cash benefit of up to $300 000 a year.[6]

The cost of the measure is $700 million over the forward estimates, with the Government expecting 110 000 companies to benefit from the measure.[7]

Although the scheme is proposed to apply to tax paid in 2012–13, a consultation paper, due to be released shortly, will provide more details about how the scheme may operate.[8]

While there is a bias towards smaller businesses in the application of the thresholds, restricting eligibility to entities that are taxed like companies excludes a significant number of small businesses, such as sole traders and partnerships, which do not operate under a company structure,.

Tax loss carry-back is part of business taxation arrangements in a number of countries, although its application differs across jurisdictions by the types of entities to which it applies, thresholds relating to the maximum amount of tax carry-back, and the number of years of tax paid that can be accessed (table 1). Compared to other countries where tax loss carry-back applies, the proposed scheme in Australia appears to be less generous in restricting eligibility to companies.

Table 1: International loss carry-back systems

Country

Loss carry-back arrangements

Canada

3 years, permitted for unincorporated businesses

France

1 year (recently reduced from 3 years) and subject to a €1 million annual cap

Germany

1 year (extends to sole traders and partnerships), capped at €0.5 million per year

Ireland

1 year (permitted for unincorporated businesses, 3 years if business ceases trading

Netherlands

1 year (3 years for 2009, 2010 and 2011 losses), capped at €10 million per year

Norway

No (temporarily introduced for 2 years if business ceases trading or for losses in 2008 and 2009), capped at NOK 20 million per year

Switzerland

No (one canton does allow 1 year carry in respect of local taxes)

United Kingdom

1 year (permitted for unincorporated businesses, 3 years if business ceases trading and temporarily extended to 3 years for losses incurred in 2008 and 2009) but subject to a £50,000 cap

United States

2 years (permitted for unincorporated businesses up to 5 years for 2008-09 losses)

Source: Business Tax Working Group, Final report on the tax treatment of losses, April 2012, p. 21, viewed 10 May 2012.

Benefits of loss carry-back

Some of the purported benefits of such a scheme are:

  • it acts as an automatic stabiliser by increasing the cash flows of previously profitable companies during economic down turns—this may in turn make government revenue more volatile, although company tax collections may recover more quickly during economic upturns
  • it removes an inherent bias against risky investments by reducing expected losses for profitable businesses in the early stages of undertaking a possible loss-making investment:  the existing wedge between post-tax returns for risky projects and those for safer investments has the effect of reducing investment in more risky proposals relative to a tax system that treats profits and losses symmetrically.[9]

Not all businesses are expected to benefit from loss carry-back, with the measure primarily aimed at assisting companies that experience a temporary setback which results in a period of losses following a period of profits. It is of limited benefit to start up companies and businesses that typically experience a sustained period of losses before generating a profit (for example, large scale infrastructure projects).[10]

Policy development

The proposal for the introduction of loss carry-back in Australia was a recommendation of the Henry Tax Review, which recommended that companies should be allowed to carry back a revenue loss to offset it against the prior year’s taxable income, with the amount of any refund limited to a company’s franking account balance.[11] Further discussions about the measure at the Tax Forum in October 2011 led the Government to commission the Business Tax Working Group (BTWG), to ‘look at reforms that can increase productivity and deliver tax relief to struggling businesses in our patchwork economy and develop a set of savings options within business tax’.[12]

However, prior to the Henry Review completing its final report, the Coalition policy, released in April 2009, proposed the introduction of carry-back of tax losses, capped at $100 000 of refunded tax per firm over the past three years.[13] The opposition leader, in his response to the 2009–10 Budget in May 2009, re-affirmed this proposal.[14]

The BTWG, in its interim report released on 11 December 2011, examined a number of different tax reform options, including a limited form of loss carry-back.[15] The BTWG’s final report, released in April 2012, considered that that loss carry-back would be a worthwhile reform in the near term but that the group had not had an opportunity to explore the relative net benefit of loss carry back compared with other business tax reforms.[16] Most of the design features proposed by the BTWG are reflected in the Budget proposal: eligibility only open to companies, a two-year loss carry-back on an ongoing basis, and a cap of not less than $1 million (or the balance of a company’s franking account).[17]



[1].       W Swan (Treasurer), ‘Second reading: Appropriation Bill (No. 1) 2012–13’, House of Representatives, Debates, 8 May 2012, p. 40, viewed 9 May 2012.

[2].       P Durkin, ‘Labor loses friends in the boardroom’, Australian Financial Review, 10 May 2012, p. 14, viewed 10 May 2012.

[3].       Ibid.

[4].       Australian Chamber of Commerce and Industry (ACCI), A budget of short term appeal, but bigger missed opportunities and a failure on company tax, media release, 8 May 2012, viewed 10 May 2012.

[5].       T Abbot (Leader of the Opposition), ‘Second reading: Appropriation Bill (No. 1) 2012–13’, House of Representatives, Debates, 10 May 2012, p. 83, viewed 11 May 2012.

[6].       G Gillard (Prime Minister) and W Swan (Treasurer), Spreading the benefits of the boom, joint media release, 8 May 2012, viewed 10 May 2012.

[7].       Ibid.

[8].       W Swan (Treasurer) and D Bradbury (Assistant Treasurer), Tax relief for businesses in our patchwork economy, joint media release, 6 May 2012, viewed 10 May 2012.

[9].       Business Tax Working Group, Final report on the tax treatment of losses, April 2012, pp. 17 and 20, viewed 10 May 2012.

[10].     Pricewaterhouse Coopers (PWC). ‘Loss carry back: Loss ‘carry back’ measure for companies’, PWC website, viewed 10 May 2012.

[11].     Australia’s future tax system, Report to the Treasurer, Part One Overview, December 2009, recommendation 31, p. 87, viewed 10 May 2012.

[12].     W Swan (Treasurer), Business Tax Working Group - Membership and Terms of Reference, media release, 12 October 2012, viewed 10 May 2012.

[13].     M Turnbull (Leader of the Opposition) and S Ciobo (Opposition spokesman on small business), Small business action plan, joint media release, 2 April 2009, viewed 10 May 2012.

[14].     M Turnbull (Leader of the Opposition), ‘Second reading: Appropriation Bill (No. 1) 2009–10’, House of Representatives, Debates, 14 May 2009, p. 3974, viewed 10 May 2012.

[15].     Business Tax Working Group, Interim report on the tax treatment of losses, 2011, p 15, viewed 10 May 2012.

[16].     Business Tax Working Group, Final report on the tax treatment of losses, 2012, p vii, viewed 10 May 2012.

[17].     Ibid., p ix.

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