A backward step
While we had low expectations for tax reform coming out of the recent 2012/13 Federal Budget, we were surprised to see tax reform actually go backwards with the deferral or cancellation of previously-announced tax reform measures. If previously-announced tax reform measures get dumped even before they get introduced, what hope do we have for major reforms? Will this year’s proposed measures get the chop next year, one might ask? Anything that uses the word “proposed” must now be questioned on whether it will see its way into reality. It seems remnants of tax reform have been sacrificed in order to fund more benefits to families instead.
Off the agenda
Cancelled or postponed measures announced on Budget night include the following:
- no company tax rate reduction (the Henry recommendation was to reduce this to 25 per cent). This would have made the headline corporate tax rate more competitive
- cancellation of tax discount for interest income (a Henry recommendation). This is a disappointing decision. Interest income receives no preferential tax treatment as compared to other asset classes such as property and shares. This measure was seen as a small step in the right direction to address the inequitable tax treatment of interest income
- simplification of the deduction for work-related expenses (a Henry recommendation). While the IPA had some design concerns on how this measure was to be implemented, it represented another positive step towards simplifying the annual tax compliance burden relating to work related expenses
- deferral of higher super contribution caps for people aged over 50. For the next two years there will only be one concessional cap that applies regardless of age. Restricting over 50-year-olds to $25,000 will play havoc with retirement plans for those nearing retirement and is an extremely disappointing announcement for those trying to provide for their own retirement
The one step forward
One positive tax reform measure announced was the loss carry back initiative. Had we known that we needed to trade off other reform measures to achieve this outcome, we could be excused for feeling less excited than what we would otherwise be when it was announced. Nonetheless, the IPA has been a strong advocate of this measure and its introduction is long overdue. It should have always been a feature of our tax system acting as an automatic stabiliser during an economic downturn.
Most are labelling this initiative a small business measure, but only one-third of small businesses operate through companies and this initiative applies to all incorporated entities regardless of size. It is, however, potentially more beneficial to smaller entities as the amount of loss carry back is capped at $1,000,000.
Operation of loss carry back
The loss carry back regime applies from 1 July 2012 and a one-year carry back applies in its first year of operation. Thereafter a two-year carry back period applies enabling taxpayers to claim losses against tax paid up to two years earlier. Thus to benefit, you will need to have made a profit in 2012 and a loss in 2013 or 2014. If the company has already distributed profits and has run down its franking account, it will not benefit from loss carry back regime as the carry back will be limited to the company’s franking account balance.
While this change is a welcome announcement, unfortunately it will not provide any immediate relief for losses incurred in the 2012 year. So any corporate small businesses doing it tough in the current or previous years will not benefit. However, it will improve the tax treatment of losses going forward for these small businesses.
