On 23 August 2012, Treasury released the exposure draft legislation Spreading the Benefits of the Boom Legislation Amendment (Loss Carry-back) Bill 2012 ("the draft bill"). The draft bill introduces a new Division 160 in the Income Tax Assessment Act 1997 to incorporate the loss carry-back provisions.
The mechanism of the loss carry-back provisions largely mirrors the recommendations made by the Business Tax Working Group (BTWG) in its Final Report on the Tax Treatment of Losses and the proposed design features outlined in Treasury's consultation paper released in July 2012. The draft bill has also addressed some concerns raised by stakeholders in relation to modifying the loss integrity rules.
Broadly, the loss carry-back rules provide a corporate tax entity the choice to carry-back all or part of a tax loss of an income year, or the preceding income year, against unutilised income tax payable in either of the two preceding income years. The rules will apply from the 2012/13 income year.
The key features
Some of the key features of the loss carry-back provisions (these remain unchanged from previous announcements) are:
- It is only available to corporate tax entities (i.e. companies or entities taxed like companies);
- It is limited to revenue losses;
- A two-year time limit applies (with a transitional one year carry-back period for the 2012/13 year); and
- The amount of losses that can be carried back will be limited to the lesser of:
- previously paid taxes in the loss carry-back period;
- an amount of loss the entity chooses;
- the entity's franking account balance; and
- a quantitative cap of $1 million.
Where the loss carry-back rules are satisfied, a corporate tax entity is entitled to a refundable tax offset for the losses it chooses to carry-back. We are pleased that Treasury has decided to adopt this approach as this is less complex and more cost effective than amending prior year tax returns.
One of the points to note is that the loss carry-back amounts must firstly be reduced by the unutilised net exempt income in the year it is carried back to. However this does not reduce the quantitative cap so long as the amount remaining after being reduced by that net exempt income does not exceed $1 million.
While there is no requirement that an eligible loss must be carried back to the earliest year first, or that the earliest loss must be carried back first, the deduction of prior year carried forward tax losses must be applied first before working out the loss carry-back offset. Any losses that remain after working out the loss carry-back offset can be carried forward as a deduction in future income years.
Interaction with the consolidation rules
When an entity first becomes a subsidiary member of a consolidated group, its unutilised carry forward tax losses are transferred to the head company subject to satisfying a modified loss recoupment rules. Transferred losses that can be utilised are then subject to an available fraction that determines the maximum proportion of transferred losses that can be used to offset the head company's relevant income or gain for a year.
The new rules will not prevent a head company of a consolidated group or a multiple entry consolidated group from carrying back losses. However a head company is prevented from applying the loss carry-back rules in relation to losses transferred in from the joining entity. Likewise, the consolidated group is prevented from carrying back any losses against taxes previously paid by the joining entity.
Modifying the loss integrity rules
Generally, in order for a corporate tax entity to recoup its tax losses it will have to satisfy the Continuity of Ownership test ("COT"), or failing that, the Same Business Test ("SBT"). The COT requires that shares carrying more than 50% of all voting, dividend and capital rights must be beneficially owned by the same persons at all times during the ownership test period (i.e. the beginning of the loss year until the end of the recoupment year).
The SBT requires that a company must demonstrate that immediately before the COT failure, it carried on the same business at all times until time that the loss is to be recouped. Furthermore, the company must be able to show that it did not enter into any new transaction or incur any new expenses that it did not incur prior to the COT failure.
The only modification made to the loss integrity rules is that the ownership test period for loss carry-back purposes will be modified to run from the beginning of the year the loss is carried back to until the end of the current income year. Undoubtedly this modification will help more corporate tax entities to access the loss carry-back rules. However it is disappointing that the Government did not take the opportunity to carry out a more thorough reform of the loss integrity rules, especially in regard to the uncertainties in applying the SBT provisions, which was flagged as an area of concern in the BTWG's final report. We hope that this will still remain on the Government's agenda and not for once assuming that the taxpayers will be satisfied with the modifications proposed.
Corporate tax entities must have lodged tax returns over the past five years in order to carry-back losses (unless they were not in existence for the whole period or were advised by the Commissioner that they are not required to lodge tax returns). It is unclear what the basis is for a five-year lodgement requirement since the carry-back period is limited to two years and the time limit for an amended assessment is four years.
Overall, we welcome the progress made on the introduction of this worthy reform, which fortunately did not meet an untimely death or delayed like so many other Government reforms in the past recent months. It is a much needed reform that will assist and appeal to many businesses doing it tough in this patchwork economy.
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