Carry-back of Losses

8.156. For many years carry-back of losses has been permitted in a number of overseas countries. In the United States losses may be carried back for three years; in Canada, the Netherlands and the United Kingdom (in effect) for one year. Currently there is no provision for carry-back of losses in New Zealand, France, West Germany or Sweden. In some countries special rules apply on cessation of business operations: in Sweden and the United Kingdom there is provision for carry-back of losses in these circumstances for two and three years respectively.

8.157. Carry-back of losses was considered by the Spooner Committee and again by the Ligertwood Committee. Many submissions requesting an amendment to the Act to permit losses to be dealt with in this way have been made to the present Committee. The Spooner Committee, while acknowledging that loss carry-back had much to commend it, foresaw formidable practical difficulties and recommended against amending the Act. These difficulties were principally the problem of collecting adequate tax revenue in periods of depressed incomes, the prevention of the early finality of assessment due to the increase in amended assessments of prior years resulting from the operation of carry-back provisions, and the inherent complications

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of amended assessment of private companies and trust estates. The Ligertwood Committee agreed with the findings of the Spooner Committee and again rejected the proposal that carry-back of losses be permitted.

8.158. In the years following the reports of these two committees it seems that the problems of business arising from the absence of any carry-back provisions for losses have increased and this view is supported by the submissions received. To some extent the difficulties flow from the inability to obtain deductions for accrued employee benefits such as long-service leave and holiday pay. In the income year in which a business activity ceases, the profits of that income year are frequently insufficient to meet the deductions which become available from the payment of employee benefits. In addition, an anomalous situation can arise in respect of private companies. For example, a private company may incur a profit for, say, the year ending 30 June 1973, which will give rise to a liability for undistributed profits tax if a sufficient distribution of that profit is not made prior to 30 April 1974. Suppose now that the company incurs heavy losses in the year to 30 June 1974 which make the payment of a dividend imprudent and in breach of company legislation. From a practical viewpoint the company has no profits available to distribute. However, it incurs a liability for undistributed profits tax at the flat rate of 50 per cent because it has failed to make a sufficient distribution of its profits for the year ended 30 June 1973. The Act takes no cognisance of the fact that the company is incapable of paying a dividend.

8.159. The Committee's recommendations relating to a deduction for accrued employee benefits will overcome some of the problems arising from the absence of provisions for carry-back of loss, but as a result of the phasing-in proposals it will be some years before a full deduction is available. The recommendation in Chapter 16 on transfer of losses between companies will in some instances also assist in the recoupment of losses.

8.160. The difficulties foreseen by the earlier committees do not appear to be sufficiently formidable to justify the continued absence of any loss carry-back. Loss carry-back will, it is true, involve some dislocation to Revenue; but this dislocation should be comparatively minor having regard to the total revenue from taxation now flowing to the Australian Government. The degree of lack of finality in assessment depends largely on the period for which losses may be carried back: a short carry-back period should not cause undue administrative difficulty.

8.161. Apart from ensuring much greater regard for the overriding principle that the tax base should reflect ‘true’ profits, carry-back has advantages in terms both of the cash-flow of business and of government economic management. The refund of tax which will result from the operation of loss carry-back should provide a business with cash funds at a time when they are most needed. Also where a downturn in the fortunes of the business coincides with a general business recession, the cash funds will provide a source of spending which should assist in stimulating economic recovery.

8.162. The absence of any provisions for carry-back of losses is partly responsible for the practice, described in paragraph 16.142, of selling the shares of ‘loss-companies’. The Committee, in Chapter 16, expresses its agreement with the measures that have been adopted to control this practice. The proposal to allow a carry-back of losses, in removing the unfairness which the practice sought to overcome, strengthens the case for the measures directed against the sale of loss companies.

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8.163. The Committee recommends that the law allow a carry-back of losses for all taxpayers other than trust estates and it believes that a period of two years should not cause undue administrative problems. It does not favour these carry-back provisions being made available to trust estates: to do so would require lengthy and complicated special provisions to ensure that the benefit of any loss carried back was in fact received by persons entitled to the benefit.