The recent Federal Budget included a new provision which will allow companies to set off subsequent year’s losses against earlier profits and so recoup income tax paid in prior years. This welcome initiative is limited to:
1. Companies, (that is ,it is not available to sole traders, partnerships or trusts)
2. Income Tax paid in the previous two years
3. $1,000,000 of losses for each of those two years.
These provisions will impact on corporate insolvencies in three ways:
Firstly, we may see fewer companies set up to act as trustee and this should lead over time to fewer of these companies being wound up. Clearly on set up the opportunity to set off subsequent years losses against past years profits will need to be weighed up against the ever diminishing income tax benefits of trading through a trust. We suspect that for many the ability to claw back income tax paid will be more attractive.
While liquidators can generally access trust assets for distribution to trustee company creditors there are occasions where complications arise. That being the case liquidators will welcome the change to fewer company/trust structures.
Secondly, we can expect some small reduction in the incidence of company insolvencies through reduced tax debts. Although not common, all liquidators have seen instances where profits earned over few good years are lost as the result of a subsequent disastrous year.
Thirdly, a liquidator in a company winding up will now be required to assess whether there is a benefit in lodging a “loss” return (which is a task not usually attended to unless a dividend is payable) either to access tax paid or more likely to reduce the debt due to the tax office.
As an aside it is difficult to understand why this excellent budget provision should be limited to companies. It seems to us that if it is equitable for companies to carry back losses the same benefits should apply to other forms of taxpayer.