|Company loss carry-back exposure draft|
The Government has released for consultation an exposure draft and explanatory material to introduce company loss carry-back into the business tax system. The exposure draft has been prepared following consultation on the discussion paper, Improving access to company losses, which closed on 6 August 2012.
As part of loss carry-back, the proposal is that, from 1 July 2012, companies will be able to carry back up to $1m worth of losses to get a refund of tax paid in the previous year. From 1 July 2013, companies will be able to carry back up to $1m worth of losses against tax paid up to two years earlier. The operative rules for the loss carry-back measure are primarily contained in Div 160 of the ITAA 1997.
The carry-back proposal was announced on 6 May 2012 and confirmed in the 2012-13 Federal Budget on 8 May 2012. A discussion paper was previously released on 18 July 2012.
Changes from discussion paper
The Assistant Treasurer said the exposure draft includes a minor amendment to the definition of "tax benefit" in Pt IVA so it can apply to loss carry-back in the same way as it can for all other deductions. It also includes integrity rules that mirror the rules used for the carrying forward of losses to set out how the rules are proposed to work for loss carry-back. The Assistant Treasurer said he will also oversee targeted consultation to identify and further develop alternative integrity rules for loss carry-back prior to legislation being introduced into Parliament. If this consultation can identify a simpler approach that adequately addresses integrity risks, the Government will adopt it, he said.
As part of the rationale for the proposed measures, the Government explained that introduction of loss carry-back would give currently profitable companies greater certainty that, if they incur a loss from undertaking an investment to adjust to changing economic circumstances, they will be able to utilise that loss. This reduces the asymmetry between the taxation of profits and losses. The Government also stated that restricting loss carry-back to those companies that have recently paid tax would also target the measure to companies that have had a history of being profitable, and would improve companies' cash flow by allowing access to losses in a timelier manner.
Entities eligible for loss carry-back
The loss carry-back will be available for corporate tax entities only as defined in s 960-115 (ie a company, a corporate limited partnership, a corporate unit trust or a public trading trust).
Loss carry-back gives rise to a refundable tax offset
A corporate tax entity will be entitled to a loss carry-back tax offset if:
Claiming loss carry-back will be optional, and the corporate tax entity must claim the offset by the time it lodges its tax return for the current year, or within such further time as the Commissioner allows.
Application against net exempt income first
Where a corporate tax entity has net exempt income in the current year, prior year unutilised losses must be applied against these amounts before loss carry-back can be claimed. Where a corporate tax entity seeks to apply a tax loss against a prior year where it has net exempt income, the tax loss will be reduced by the net exempt income of the prior year before being converted into an offset.
Utilised and unutilised tax losses
An entity will be able to utilise a tax loss to the extent that it deducts the tax loss, applies it against an amount of assessable or net exempt income, or uses it to produce a loss carry-back tax offset with relation to the loss. A tax loss will be unutilised for a given year to the extent that an entity has not utilised the tax loss.
Losses eligible for loss carry-back
In the most basic case, an unutilised tax loss will be able to be carried back from the year it arises. An unutilised tax loss from the middle year may also be carried back from the current year in some cases. A corporate tax entity can also carry-back losses from both the middle year and the current year. In this case, eligible losses for the current year include the current year loss (if any) and the unutilised part of the middle year's loss. As a result, a corporate tax entity will be able to choose between using the unutilised part of the middle year loss to reduce taxable income in the current year, and applying it for the purposes of carry-back.
Note: Tax losses not used for loss carry-back in the current year will be available to reduce any taxable income in that year or a future year.
Tax losses ineligible for carry-back
Amounts deemed to be a tax loss because the corporate tax entity has excess franking offsets for that year will not be eligible for carry-back. The reason for this exclusion is that excess franking offsets represent payments of tax and are not economic losses. Also, tax losses transferred under Div 170 will also be ineligible for loss carry-back. Note a capital losses cannot be carried back either.
The loss carry-back period
From the 2013-14 income year onwards, a loss carry-back refund will be able to be claimed against tax liabilities of either of the two years preceding the current year. A transitional one year carry-back period will be provided for the 2012-13 income year. This means that a loss carry-back refund is only able to be claimed for the 2012 13 income year against tax paid for 2011-12.
Calculating carry-back offset
By way of background, the "earliest year carry-back amount" is the total amount of the unutilised tax losses from the current year and the middle year that the entity chooses to carry-back to the earliest year.
The "middle year carry-back amount" is so much of the unutilised tax loss of the current year that the entity chooses to carry back to the middle year. Each of those carry-back amounts is then reduced by any unutilised net exempt income in the year it is carried back to. These calculations produce a "reduced earliest year carry back amount" and a "reduced middle year carry back amount".In this case, the corporate tax entity's "earliest year offset component" is the lesser of the reduced earliest year carry-back amount multiplied by the corporate tax rate, and the unutilised income tax liability for the earliest year. Likewise, the entity's middle "year offset component" is the lesser of the reduced middle year carry-back amount multiplied by the corporate tax rate, and the unutilised income tax liability for the middle year.
Finally, the corporate tax rate used to derive the amount of the loss carry back tax offset components will be the current year's corporate tax rate and that the amount of the entity's loss carry-back tax offset is the sum of its earliest year offset component and the middle year offset component.
Limits on the loss carry-back offset
The maximum loss carry-back tax offset will be the least of the:
Note also that if the corporate tax entity is a foreign entity with a permanent establishment in Australia, the franking account balance restriction will not apply.
In addition, a corporate tax entity must also have an unutilised income tax liability in either the middle or the earliest year (ie the company must have been assessed as owing an amount of income tax for either the middle or earliest year). However, the payment of tax, whether by PAYG instalments etc, will not affect the tax liability figure of the year the loss is carried back to. Rather, the income tax liability refers to the amount of income tax to which the corporate tax entity is assessed for either year.
No ordering rules will apply to using losses for the loss carry-back tax offset – that is, 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. However, the deduction of tax losses occurs before the loss carry-back refundable offset is worked out, and the loss carry back tax offset is then applied after the corporate tax entity has calculated its basic income tax liability for the year. Note also that each part of a loss can only be used once.
Consolidation and transferred tax losses
Loss carry-back will be available to the head company of a consolidated group or MEC group. However, consolidated groups and MEC groups cannot access loss carry back in relation to losses brought into the group by a joining entity. Also when an entity with prior year tax liabilities joins a consolidated group or MEC group, the group will not be able to carry back any tax loss against tax previously paid by the joining entity. An entity can only carry its losses back against its own tax liabilities. Note also that loss carry-back is not available for losses transferred to an entity under Div 170.
A corporate tax entity will not be able to choose to carry-back an unutilised loss where it fails to satisfy the "continuity of ownership" or "same business" tests of Div 165. For loss carry-back purposes, the continuity of ownership test will be modified so that the ownership test period runs from the beginning of the year the loss is carried back to until the end of the current year. This ensures symmetry between the operation of loss carry-forward and loss carry back, and that the rules apply identically across the test period for both loss carry-back and loss carry-forward.
Where a corporate tax entity fails the modified continuity of ownership test, it may still claim a loss carry back refundable tax offset if it satisfies the same business test. As with carried forward losses, the corporate tax entity must have maintained the same business throughout the current year that it carried on just before it failed the continuity of ownership test. However, note that where a corporate tax entity experiences a change of ownership and fails the same business test within the current year, it will be able to carry-back a loss in part of the year arising before it failed the continuity of ownership test if it could have done so if that part of the year had been the whole of the year. This is intended to mitigate any disincentive associated with selling a loss making company before the end of a loss year.
A corporate tax entity must have lodged an income tax return for the current year and each of five years immediately preceding the current year in order to claim loss carry-back (unless the Commissioner might has advised the entity that it did not need to lodge a return for a year).
Likewise, in view of the full self-assessment regime, the Commissioner can rely on assessment for the purposes of establishing the accuracy of the corporate tax entity's losses and liabilities, so not having lodged a return for that year also does not disentitle an entity to a loss carry-back tax offset.
Claiming loss carry-back against a particular middle or earliest year does not give rise to "interest on overpayments" in relation to the tax liability assessed for either the middle or earliest year or reduce any general interest charge or shortfall interest charge arising from a failure to pay the original assessed liability of the middle or earliest year.
A loss carry-back tax offset will be recoverable where a review of a corporate tax entity's tax affairs leads the Commissioner to conclude that the corporate tax entity was not entitled to it. On the other hand, if a corporate tax entity did not claim loss carry-back for a current year in which it could have, or claimed a smaller amount than it was potentially entitled to, it will be able to seek an amendment of its assessment accordingly, subject to the usual amendment periods or where the loss for one income period is reduced, but it could have chosen to carry back a loss from another income year instead.
Date of effect
Subject to the passage of legislation, the changes are expected to apply from the 2012-13 income year with a one year carry-back period applying in 2012-13, transitioning to a two year carry-back period for the 2013-14 and later income years.