Swan bakes an undercooked SME tax break

A budget measure to let SMEs carry back business losses brings Australia into line with a number of other countries, but the devil is in the detail.

SmartCompany

You get the feeling there will be plenty of bad news in the federal budget, given the way Treasurer Wayne Swan and Prime Minister Julia Gillard have been strategically leaking the good news in recent days.

We’ll have to wait another sleep to pass judgement on that, but today we can celebrate a bit with a good announcement for small business, with the government set to introduce on Tuesday night the much talked about loss carry-back reform for companies with $2 million in turnover and less.

Currently, businesses can only carry forward losses. That is, if you experienced a loss in 2010, you can carry this forward and use it to offset the tax you should pay on your profit in 2011.

But under the new tax break, businesses will be able to carry losses back. So if you made a profit in 2011 but a loss in 2012, you’ll be able to carry back that loss and offset it against the tax paid in the previous year.

In other words, you’ll get a tax refund if you make a loss – a great help, I am sure everyone will agree – provided you posted a profit in a previous year.

You can carry back losses of up to $1 million, with a maximum benefit of $330,000. The initiative will cost the government about $700 million a year.

It’s a great idea that tax reformers have been campaigning for over the last few years, most recently through the treasurer’s own business tax working group.

It’s a measure that should help small businesses when they need it most (that is, when they are struggling and posting losses) and it brings Australia into line with a number of other countries that have a carry-back break.

It’s a great idea, but as with most things governments do, the devil is in the detail.

The provision starts from July, but if you are posting a loss in the 2012-13 financial year you will only be able to use the loss carry-back provisions if you posted a profit in the 2011-12 financial year.

So to those small businesses with losses over the past three years – you know, the ones most in need of help – there is no relief. (From July 2013 you’ll be able to use the provision if you made a profit in either of the two previous years.)

The government says the measure will help 110,000 small businesses initially, which sounds quite good until you consider there are more than two million small businesses in Australia.

The reason the help is limited is because the measure only applies to incorporated companies, which account for about 720,000 of the 2.7 million small businesses in Australia.

The hundreds of thousands of businesses operating as sole traders, partnerships and through trusts will get no assistance.

There’s a distinct feeling from tax experts that this piece of policy has been somewhat undercooked, rushed through without thinking about whether it should be widened to include all businesses rather than just incorporated ones, or whether it could have been made available to companies above the $2 million threshold.

There’s also the little matter of how the move will be paid for. While the loss carry-back won’t have any impact on the budget position in the 2012-13 year, it will need to be paid for after that, and there is a nagging suspicion that eligibility criteria around the new research and development tax break could be tightened, with larger companies missing out.

Swan deserves credit for backing what is at its core a great idea. But just how much credit he deserves will be determined when we see the budget in its full detail.

This article first appeared on SmartCompany on May 7. Republished with permission.

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