Chapter 3: Loss carry back

Loss carry back would support business investment

The Working Group believes that there is a case for introducing loss carry back into the Australian company tax system. This was widely accepted during consultations with stakeholders. By reducing the tax bias against riskier but worthwhile projects, loss carry back could be expected to provide benefits for businesses and the economy by supporting business investment and improving investment decisions in response to changes in the wider economy. Loss carry back has been adopted in a number of OECD countries.

The Working Group has not had sufficient time to fully explore the net benefits of loss carry back and possible offsetting saves relative to other possible reforms. Nonetheless, the Working Group considers that loss carry back is a worthwhile reform in its own right and has identified some design and implementation options that could be adopted.

Loss carry back is a form of loss refundability

Loss carry back would allow companies to use a current year loss against taxable income in previous years, resulting in a refund for all or part of the tax value of that loss to the extent of taxes paid in previous periods.

Loss carry back differs from the benchmark of full loss refundability since refunds are limited to taxes paid prior to the loss year. As such, there would be fewer refunds distributed under loss carry back and those refunds would be smaller on average compared to full refundability.

Loss carry back would reduce the effective marginal tax rate on new risky investments by providing companies with more certainty that they will receive a tax refund for any future losses. This reduces the bias against risky investments that currently exists in the company tax system and supports businesses adapting to changed economic conditions, for example, by innovating to take advantage of new opportunities or making plans for an orderly exit (for example, by settling existing debts and assisting employees to transition to new jobs). Investments would be made with a greater expectation that a business would receive tax refunds if losses are incurred in future years.

Loss carry back has been implemented in a number of OECD countries including Canada, France, Germany, Ireland, Singapore, the United Kingdom and the United States. Box 3.1 outlines the carry back systems in some OECD countries.¹³ It is common practice within these systems to limit the carry back period, normally from one to three years, such that businesses can only use current period losses against taxes paid over that period.

Loss carry back acts as an automatic stabiliser

Loss carry back allows businesses to access the tax value of their losses by providing tax refunds for loss periods. This has an automatic stabiliser effect by increasing cash flows for previously profitable companies during economic downturns when they are most needed, without the need for direct government intervention. Businesses that are credit constrained can use these increased cash flows to make new investments and adapt and recover more quickly from a loss position. This increased investment and activity helps to reduce the magnitude and longevity of economic downturns.

This automatic stabiliser effect of loss carry back makes government revenues more volatile. Less revenue would be collected during economic downturns as more companies incur losses, and more tax refunds are provided to those loss making companies. On the other hand, company tax collections would recover more quickly during economic upturns due to the smaller stock of carry forward losses being utilised as companies return to profit.

The Working Group considers this automatic stabiliser effect to have some benefits over ad-hoc government interventions in response to changes in economic conditions as the benefits of loss carry back are both timely and broad in scope. However, not all companies will benefit from loss carry back and not all companies will be able to access the full benefit of the tax value of their losses, for example, if the tax value of losses is greater than previous taxes paid. To the extent that loss utilisation is limited in this way, and by other design features that are discussed later in this chapter, the automatic stabiliser effect will not be as strong as under full loss refundability.

Table 3.1 International loss carry back systems

Country	Loss carry back
Australia	No
Austria	No
Canada	3 Years (permitted for unincorporated businesses)
Denmark	No
France	1 year (recently reduced from 3 years and subject to a €1 million annual cap)
Germany	1 year (Extends to sole traders and partnerships, capped at €0.5 million per year)
Ireland	1 year (permitted for unincorporated businesses, 3 years if business ceases trading)
Italy	No
Mexico	No
Netherlands	1 year (3 years for 2009, 2010 and 2011 losses, capped at €10 million per year)
New Zealand	No
Norway	No (temporarily introduced for 2 years if business ceases trading or for losses in 2008 and 2009, capped at NOK 20 million per year)
Spain	No
Sweden	No
Switzerland	No (one canton does allow 1 year carry in respect of local taxes)
United Kingdom	1 year (permitted for unincorporated businesses, 3 years if business ceases trading and temporarily extended to 3 years for losses incurred in 2008 and 2009 but subject to a £50,000 cap)
United States	2 years (permitted for unincorporated businesses up to 5 years for 2008-09 losses)

Source: Table adapted from OECD, Corporate Loss Utilisation through Aggressive Tax Planning (2011), p.34.

The Working Group has considered making loss carry back available to all businesses

Most businesses face a risk of making losses from time to time, regardless of their organisational structure. Whilst the Working Group has given serious consideration to how loss carry back might be made available to all business structures, it has focussed its attention initially on companies and entities that are taxed like companies. As mentioned in Chapter 1, company structures tend to be the organisational form preferred for risky investments and typically face more constraints on their ability to realise the value of their tax losses than businesses operating through alternative structures (except for trusts). For other business entities, the additional administrative costs of introducing loss carry back could outweigh the benefits that loss carry back provides.

Companies

Companies already collect the information needed to administer loss carry back. As a result the compliance costs of applying loss carry back to companies would not be expected to be significantly different from current costs. It is not expected that the increase in compliance costs from the introduction of loss carry back would significantly offset the benefits of increased loss utilisation.

Trusts

A number of stakeholders raised the idea that it would be beneficial to extend loss carry back to trusts. However, this would be difficult. The Working Group acknowledges that applying loss carry back rules to trusts that are taxed as companies (public trading trusts and corporate limited partnerships) would be similar to applying loss carry back to companies as they must also lodge a company tax return and collect the appropriate information. For example, loss carry back would be available only in cases where trusts are taxed like a company over the loss year and the carry back period. This is not likely to provide large benefits as there are only a small proportion of trusts that are taxed as companies.

The Working Group believes that extending loss carry back to trusts more broadly would not be feasible. Trusts are generally not subject to tax, which means that tax losses for trusts would need to be offset against taxes paid at the beneficiary level. A trustee is unlikely to be aware of a beneficiary's marginal tax rate (other than in some closely held trust scenarios) and they may not have detailed knowledge of a beneficiary's overall tax profile, including whether the beneficiary actually paid income tax on any trust distributions. Due to other income sources and deductions, some beneficiaries may fall below the tax free threshold and would thus not pay any tax on trust distributions or pay tax at a lower average tax rate than their marginal tax rate.

A further complication arises for discretionary trusts, as there are no strict rules around distributions to beneficiaries. As a result, benefits from loss carry back may not flow through to those beneficiaries that paid the tax on previous distributions without complicated and impractical tracing rules.

Sole traders and partnerships

Loss carry back could potentially be applied to sole traders and partnerships by allowing them to carry back business losses against taxes paid in respect of taxable income earned in carrying on a business. Some stakeholders expressed their support for such an extension to loss carry back.

However, in addition to imposing additional compliance costs, loss carry back would place additional pressure on the boundary issues that currently exist in the tax law between income and deductions associated with business and personal activities. Rules for sole traders would be required to allocate income and expenses between the business and other investments, for example a share portfolio or property. This would be less of an issue for partnerships that must distinguish between partnership and personal income and expenses.

Partnerships are not taxed in their own right — any taxable income or loss flows through to the partners. To the extent that corporate partners receive taxable income or a distribution of a partnership loss in any income year, the rules applying to companies (including the recommendations in this paper) would apply to that corporate taxpayer. Sole traders and individual partners in partnerships arguably have a greater degree of flexibility in utilising losses associated with their business activities than companies. For example, losses incurred by sole traders and individual partners in partnerships can already be offset by income earned through other activities and other available tax offsets. So the case for loss carry back is arguably less compelling in respect of these taxpayers.

An additional challenge of applying loss carry back to sole traders and individual partners in partnerships is that they face a progressive tax rate schedule and multiple marginal tax rates. This would complicate the calculation of available carry back refunds for businesses as well as decisions around when to utilise the loss carry back system.

Given the difficulties involved in applying loss carry back to trusts generally and the limited benefits for sole traders and partnerships with individual partners relative to the additional costs, the Working Group has concluded that loss carry back should initially be limited to companies and trusts that are taxed as companies. Extending loss carry back to other business structures could be considered further in the future.

The Working Group has considered the possible design of loss carry back

A two year carry back period strikes the right balance

As mentioned above, it is common practice internationally to limit the carry back period, generally to between one and three years. This reduces the administrative costs of storing, amending and auditing tax returns from previous periods and also places a limit on the impact of loss carry back on government revenues.

There are trade-offs with choosing the length of the carry back period. A shorter carry back period limits the Government's exposure to the revenue effects of loss utilisation as refunds would not be as large during economic downturns. However, it would also limit the benefits that companies can derive from loss carry back during loss periods, and limit the automatic stabiliser effect. A shorter carry back period means that companies experiencing large losses (relative to taxes paid over the carry back period) or longer periods of loss may not be able to access the full tax value of current period losses. Longer carry back periods would have a larger effect on the taxes paid by some companies and would allow companies greater access to the tax value of their losses. Compared to the carry back periods chosen in international carry back systems (between one and three years), a carry back period of two years strikes a balance between allowing companies to offset current period losses and limiting the exposure of government revenues.

Loss carry back periods can also be amended to reflect the economic environment. For example, after the global financial crisis, in an effort to stimulate business activity the United States and the United Kingdom both extended the allowable time period over which losses could be carried back. This increased access to losses and provided assistance to struggling businesses. In some cases, governments have extended the carry back period for businesses that incur losses in shutting down. This allows companies to access the tax value of more of their losses, particularly when this involves multiple loss periods. Providing a refund to closing companies can be seen as providing a cash flow benefit that will flow on to future consumption or investment in the economy.

The Working Group considered the potential merits of a longer initial carry back period of three years to provide further assistance for businesses affected by the Global Financial Crisis (GFC). However, the Working Group believes that this assistance would not be necessary or useful as affected companies are likely to have already made adjustments in response to the effects of the GFC. For loss carry back to be useful to companies affected by the GFC, it would need to apply retrospectively to losses already incurred or to allow new losses to be carried back to pre-GFC period profits. The Working Group considers it would be more beneficial to the economy to apply loss carry back with the view to improving future investment and business decisions.

Any refunds should be limited to a company's franking account balance

In its interim report the Working Group suggested that any refunds provided under loss carry back might be limited by the franking account balance due to interactions with the imputation system, as restated below. This position was generally endorsed by stakeholders.

Companies can attach franking credits to dividends for the taxes already paid at the company level. Foreign shareholders can use these credits against withholding taxes on franked dividends. All related transactions (for example, paying taxes, receiving tax refunds and distributing franking credits) are recorded in franking accounts. When a franking account has a negative balance at the end of a period, companies must pay a franking deficit tax (FDT) to bring the account balance to zero.

Because of the FDT, the benefits of loss carry back are automatically limited to the positive balance of the franking account. While this result limits the impact on Government revenue, it also creates administrative costs by creating ‘churn' in the tax system, whereby companies are paid refunds and then must pay back taxes to the extent that those refunds result in a negative franking account balance.

The timing of FDT would also be relevant for this interaction effect. A company's liability for FDT is worked out at the end of the income year but refunds paid within three months after the end of the income year are included in the calculation of FDT for that year. So a loss carry back refund paid within three months after the end of the income year may result in a FDT liability. Companies that receive a loss carry back refund more than three months after the start of the income year would have the rest of the current income year to make up their franking account balance (and thereby avoid FDT for that year).

To deal with this issue the Working Group considers that loss carry back refunds should be limited so that they do not result in a negative franking account balance. This would reduce the churn caused by the interaction between loss carry back and the imputation system as well as the potential for inequitable outcomes between taxpayers depending on when they are paid their refund.

The Working Group recognises that this proposal may induce some companies to reduce their dividend pay-out rate to increase the reserve of franking credits to support the carry back of losses.

A quantitative cap provides a flexible approach to targeting

A quantitative cap limits the amount of losses that taxpayers can carry back against taxes paid in previous periods. Quantitative caps have been used, for example, in the carry back systems of Germany and the United Kingdom.¹⁴ A quantitative cap is also easy to adapt when needed to meet policy objectives. For example, the cap might be increased during an economic downturn to stimulate investment, although frequent changes to the cap could create uncertainty.

A quantitative cap can target the benefits of loss carry back to small and medium sized companies struggling with the two speed economy, without relying on legislative definitions around company size and type.

Targeting companies using the existing definition of a small business entity (that is, a taxpayer who carries on a business and has aggregated turnover of less than $2 million per year)¹⁵ would limit loss carry back to the 760,000 small business entities that are incorporated.¹⁶ Moreover, expanding the application of loss carry back using legal definitions of small and medium sized companies would add further complexity to the tax law and would still create incentives for restructuring as companies attempt to benefit from the loss carry back rules. A quantitative cap would allow all companies to claim carry back while still targeting the benefits to smaller and struggling companies.

Applying a quantitative cap would reduce the overall cost of providing loss carry back and reduce the Government's exposure to large losses incurred by individual businesses, while still providing benefits to all eligible companies.

The Working Group notes that limiting the overall cost of loss carry back also limits the effectiveness of loss carry back compared to the economic benchmark of full loss refundability. A larger cap increases the potential refunds that can be paid to companies in respect of loss periods but also increases the exposure of government revenues to economic downturns. Choosing a cap level is a policy choice that will be, in part, dependent on economic and fiscal conditions.

The Working Group envisages that a cap would apply to the tax loss that can be carried back from a particular year, not the amount of taxable income in a previous year that can be offset. For example consider a two year loss carry back with a cap of $1 million and a company that had paid tax on $2 million of taxable income in year one and incurred tax losses in years two and three. The losses in years two and three could be carried back against the tax income in year one, up to $1 million in each of the two years. Any losses that cannot be carried back due to the cap (or other limit) would be carried forward.

The Working Group analysed possible reform options in light of a $1 million cap (resulting in a $290,000 maximum carry back refund from 2013-14 onwards, assuming a 29 per cent tax rate) and also discussed this cap during consultations with stakeholders. While there was agreement that this cap was appropriate, there were some calls for a larger cap. With this in mind the Working Group supports a quantitative cap of not less than $1 million but further analysis could be conducted on the benefits of a higher cap, for example the effect of a $5 million cap on both the cost and impact of loss carry back. The higher $5 million cap was particularly supported by stakeholders in the tourism sector, which is currently facing difficult trading conditions due to the impact of the high value of the Australian dollar. For example, companies undertaking investments such as hotel or resort refurbishments may be influenced by carry back with a $5 million cap.

Loss carry back does not need to involve amended assessments

Conceptually, loss carry back could require a taxpayer's previous tax assessments to be amended. When a company claims a tax refund for a current period loss, previous tax assessments may be reopened and altered to reflect the reversal of tax paid in those periods due to carry back. This delivery mechanism could become administratively costly as old tax returns must be maintained and updated as loss carry back is utilised.

Additional compliance costs would arise if amendments are made to previous tax returns. A taxpayer's assessment for the year in which they incurred a loss (and received a carry back refund) may subsequently be amended such that they were not entitled to loss carry back or were entitled to a greater refund than was provided. Correcting this would require reopening and amending the tax return from the loss year as well as the tax returns over the carry back period.

Further problems may also arise if some of the tax returns that need to be amended fall beyond the Commissioner's amendment period. To deal with this problem, additional income tax could be imposed on the taxpayer to claw back incorrect refunds or additional refunds could be provided if taxpayers are found to have been entitled to a greater refund. This would eliminate the need to reopen and amend previous tax returns in light of an audit by the Commissioner, significantly reducing the administrative costs of reversing incorrect refunds.

However, amending previous assessments is not the only delivery mechanism available for providing loss carry back. A similar result could be achieved through the use of a refundable tax offset. For example, a company could become entitled to a refundable tax offset in a year it has negative taxable income and has paid income tax in at least one year over the carry back period. So, in the case where carry back is limited to a company's franking account balance and a quantitative cap, the amount of the refundable tax offset would be the lesser of:

• the tax value of the company's tax loss for the current year;
• the company's franking account balance;
• the tax value of any quantitative cap imposed on loss carry back; and
• the amount of income tax paid over the carry back period.

The relevant proportion of the company's tax loss would then be converted to a refundable tax offset and, subject to any outstanding tax liabilities, paid to the company. To substantiate a claim for the refundable tax offset, a company would need to provide details of previous claims (to ensure there is no double dipping). The refundable tax offsets would be counted as a debit in the franking account.

This delivery mechanism is likely to be administratively easier as it would remove the need to reopen previous tax returns and reduce the risk of complications due to the Commissioner's allowable amendment period. However, previous tax returns would still need to be maintained and accessed to calculate the refundable tax offset that is available to taxpayers. Any review of the company's tax affairs which lead the Commissioner to conclude that the company was not entitled to a refundable tax offset in a previous year could lead to the offset being disallowed.

From a tax administration perspective, we should also note that in the year in which a refund occurred, a franking debit would arise to the extent of the refund provided (this means that the franking credits are not then also available to frank dividends which would give a double-dip on those franking credits).

Loss carry back will benefit businesses experiencing a temporary shock

Loss carry back would be more beneficial to some companies than others. It will not directly assist companies that have not paid tax before (for example, some start-up companies) or those that do not have losses to carry back (for example, constantly profitable companies). However, to the extent that such companies expect to be profitable in general, loss carry back would still be beneficial in relieving the tax bias against investing in riskier projects. Consolidated groups are not expected to be large beneficiaries of loss carry back as they are able to offset losses of one subsidiary with the profits of another subsidiary under the single entity rule.

The worked examples set up earlier can illustrate the situations in which companies will gain the greatest benefit from loss carry back. It should be noted that, for simplicity and illustrative purposes, the examples show carry back refunds being paid in the year that the associated losses are made. In reality, refunds paid in respect of a loss year will be received in the next income year after company tax returns have been filed and processed. The worked examples assume a company tax rate of 29 per cent (30 per cent in 2012-13) and a two year carry back period, limited to a quantitative cap of $1 million and the franking account.

Year	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18
Assessable income	$2,000,000	$2,000,000	$2,000,000	$1,200,000	$1,800,000	$2,500,000
Expenses — excluding depreciation	($200,000)	($200,000)	($200,000)	($1,000,000)	($500,000)	($200,000)
Deductions — depreciation	($200,000)	($200,000)	($200,000)	($800,000)	($800,000)	($800,000)
Deductions — losses	$0	$0	$0	$0	$0	$0
Taxable income	$1,600,000	$1,600,000	$1,600,000	($600,000)	$500,000	$1,500,000
Tax payable	$480,000	$464,000	$464,000	$0	$145,000	$435,000
Loss carried back	$0	$0	$0	$600,000	$0	$0
Carry back refund	$0	$0	$0	$174,000	$0	$0
Total carry forward losses	$0	$0	$0	$0	$0	$0

Year	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18
Assessable income	$3,000,000	$3,000,000	$2,000,000	$1,000,000	$500,000	$1,000,000
Expenses — excluding depreciation	($500,000)	($500,000)	($500,000)	($500,000)	($2,500,000)	($500,000)
Deductions — depreciation	($1,000,000)	($1,000,000)	($1,000,000)	($1,000,000)	$0	($100,000)
Deduction for carry forward losses	$0	$0	$0	$0	$0	($400,000)
Taxable income	$1,500,000	$1,500,000	$500,000	($500,000)	($2,000,000)	$0
Tax payable	$450,000	$435,000	$145,000	$0	$0	$0
Loss carried back	$0	$0	$0	$500,000	$500,000	$0
Carry back refund	$0	$0	$0	$145,000	$145,000	$0
Total carry forward losses	$0	$0	$0	$0	$1,500,000	$1,100,000

Year	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18
Assessable income	$25,000,000	$25,000,000	$12,000,000	$15,000,000	$20,000,000	$30,000,000
Expenses — excluding depreciation	($18,000,000)	($19,000,000)	($16,100,000)	($18,000,000)	($19,000,000)	($18,000,000)
Deductions — depreciation	($750,000)	($750,000)	($900,000)	($950,000)	($1,800,000)	($1,800,000)
Deductions — losses	$0	$0	$0	$0	$0	($7,750,000)
Taxable income	$6,250,000	$5,250,000	($5,000,000)	($3,950,000)	($800,000)	$2,450,000
Tax payable	$1,875,000	$1,522,500	$0	$0	$0	$710,500
Loss carried back	$0	$0	$1,000,000	$1,000,000	$0	$0
Carry back refund	$0	$0	$290,000	$290,000	$0	$0
Total carry forward losses	$0	$0	$4,000,000	$6,950,000	$7,750,000	$0

Year	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18
Assessable income	$25,000,000	$25,000,000	$12,000,000	$15,000,000	$20,000,000	$30,000,000
Expenses — excluding depreciation	($18,000,000)	($19,000,000)	($16,100,000)	($18,000,000)	($19,000,000)	($18,000,000)
Deductions — depreciation	($750,000)	($750,000)	($900,000)	($950,000)	($1,800,000)	($1,800,000)
Deductions — losses	$0	$0	$0	$0	$0	($800,000)
Taxable income	$6,250,000	$5,250,000	($5,000,000)	($3,950,000)	($800,000)	$9,400,000
Tax payable	$1,875,000	$1,522,500	$0	$0	$0	$2,726,000
Loss carried back	$0	$0	$5,000,000	$3,950,000	$0	$0
Carry back refund	$0	$0	$1,450,000	$1,145,500	$0	$0
Total carry forward losses	$0	$0	$0	$0	$800,000	$0

The worked examples show that otherwise profitable companies that experience a short term loss will benefit the most from loss carry back. This benefit will decrease the longer the company stays in a loss position.

Based on historical data, the industries (as defined by the Australian Tax Office's (ATO) industry codes) that would be expected to be the largest beneficiaries of a two year carry back, limited to company franking account balances and subject to a $1 million cap, include: construction (15 per cent of the total benefit), finance and insurance (15 per cent), manufacturing (15 per cent), professional scientific and technical services (10 per cent) and wholesale trade (10 per cent) and 35 per cent distributed among the remaining 16 main industry categories.

In terms of company size (according to the entity size definitions used by the ATO)¹⁷, the distribution of benefits would be expected to accrue mostly to micro companies (40 per cent), then small companies (25 per cent), medium companies (25 per cent), large companies (five per cent) and then very large companies (five per cent).

Treasury's analysis of loss carry back is based on historical company tax return data from 2003-04 to 2009-10. The distributional analysis represents the industries that would have benefited if loss carry back had been in place from 2003-04 but is nonetheless indicative of which industries are the most likely to benefit if carry back were introduced in the future.

Prospective implementation would reduce the costs

It would be preferable to introduce loss carry back as soon as possible to assist businesses that experience losses as a result of changes in the economic environment. The Working Group is also mindful that the Government may be attracted to announcing reforms to the tax treatment of losses in the 2012-13 Budget, with a 1 July 2012 start date, to boost business confidence in sectors not favoured by current economic conditions.

The Working Group considered the introduction of a two-year loss carry back from 2012-13 (that is, in respect to tax losses incurred for that year). The cost of loss carry back over the forward estimates on this basis would be around $800 million (see table 3.2 below).

The Working Group also considered phasing in loss carry back from the 2013-14 year with an initial carry back period of one year. That is, any loss incurred in 2013-14 could be carried back against taxable income from 2012-13. From that point onwards, the carry back period would be two years. This approach substantially cuts the cost of introducing loss carry back over the forward estimates and hence the quantum of savings that need to be found. This completely prospective approach to loss carry back is also arguably more consistent with our mandate to relieve the tax burden on only new investment.

Regardless of the introduction date, Treasury's costing of the annual cost of loss carry back (as recommended by the Working Group) indicates that the cost at maturity would be in the order of $300 million per annum.

The Working Group has been informed that it may be feasible to have legislation in place by the end of the 2012-13 income year (including consultation on draft legislation), but understands that this would be subject to the Government's legislative drafting priorities. Introducing a prospective loss carry back would ease the pressure on completing other drafting by the end of 2012-13.

Table 3.2: Estimated cost of loss carry back

Estimated costs ($ millions)
	2011-12	2012-13	2013-14	2014-15	2015-16	Total
Phase in of loss carry back from 2013-14 with an initial carry back period of one year, an ongoing carry back period of two years and a $1 million cap	0	0	0	150	300	450
Loss carry back commencing in 2012-13 with two year carry back period with a $1 million cap	0	0	250	250	300	800

Conclusion

The Working Group considers it worthwhile for the Government to pursue loss carry back as a form of increased loss utilisation that provides many of the benefits of full loss refundability.

To manage the trade-off between targeting reforms to small and medium sized businesses and identifying required offsetting savings while still decreasing the bias against risk taking by companies, a two year carry back could be provided, limited by a quantitative cap of not less than $1 million and the franking account balance.

Consideration should be given to implementing loss carry back through a refundable tax offset to reduce the legislative, administrative and monitoring costs of the reforms.

Recommendation

Recommendation 2:

The Working Group considers that loss carry back would be a worthwhile reform in the near term and could be implemented consistent with a model that:

• is limited to companies;
• provides a two-year loss carry back period on an ongoing basis;
• limits the amount of losses that can be carried back by applying a cap of not less than $1 million;
• limits the amount of refunds to a company's franking account balance; and
• is phased in from 2013-14 with an initial one year carry back period.

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¹³ Appendix D contains a more detailed outline of the treatment of losses in OECD countries.

¹⁴ The United Kingdom only introduced a temporary quantitative cap in respect of the extension of loss carry back during the global financial crisis.

¹⁵ Section 328-110 of the ITAA 1997. The AFTS Review recommended that the Government consider increasing the turnover threshold to $5 million.

¹⁶ Only 28 per cent of all small business entities are incorporated (760,000 out of 2.7 million).

¹⁷ Micro entities have annual turnover of $1 or more but less than $2 million. Small entities have annual turnover of $2 million or more but less than $10 million. Medium entities have annual turnover of $10 million or more but less than $100 million. Large entities have turnover of $100 million or more but less than $250 million. Very large entities have annual turnover of $250 million or more.