Losses Compliance Report presented by Adam Kendrick of LB&I CGT and Losses Segment.
Total losses
Market segment break-up of 2007 (1) losses pool:
Market
|
Total losses
carried forward
|
Total Losses utilised ($b)
|
Total Losses incurred ($b)
|
$b
|
No.
|
Large
|
47
|
2,000
|
8.5
|
8.3
|
SME
|
44
|
26,000
|
6.0
|
10.4
|
Micro
|
46
|
491,000
|
4.8
|
13.9
|
Individuals
|
2
|
101,000
|
0.3
|
0.7
|
Total
|
139
|
620,000
|
19.6
|
33.2
|
There are almost $140 billion losses in the system (companies make up 85% of the value).
The amount of losses incurred has been relatively stable over the last three years (averaging $30.9 billion). The amount of losses utilised in the last three years has averaged around 13% of the pool in any year (averaged $17.5 billion).
What we are seeing and results
The issues that continue to arise are:
- transfer pricing (Large Market) - creation of significant losses. In particular, taxpayers attempting to inappropriately shift foreign business losses into their Australian business outside the new foreign loss rules. Refer to Taxpayer Alert 2008/18
- errors in calculating/reconciling losses and therefore over claiming of losses (particularly in S&ME and also suspected in Micro Enterprises and Individuals [MEI])
- incorrect transfers of losses post the introduction of the consolidations regime (S&ME and MEI)
- failure in meeting the deductibility tests for companies, that is the COT and the same business test (SBT) (Large and S&ME). For COT the issues revolve around the difficulty in determining the failure date; difficulties with tracing; and the 'same share same interest' rules. For SBT there are problems gathering and establishing the facts and taxpayers taking a high level industry view of the business rather than looking at the activities carried out by the business
- recordkeeping problems (S&ME and MEI) - records of old losses not being kept to prove claims
- where a loss entity exits a consolidated group, the losses remain with the head company. In this case the head company will need to be mindful that it will need to retain records to substantiate the losses
- for more information on record keeping where losses are incurred, see Taxation Determination TD 2007/2 - Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?
- if a company incurs tax losses, it may need to keep records longer than five years from the date on which the losses were incurred. It is in the company's interest to keep records substantiating losses until the amendment period for the assessment in which the losses are applied has lapsed (up to four years from the date of that assessment)
- there is a reluctance to calculate the available fraction and undertake continuity of ownership tracing until such time as the company recoups tax losses
- companies that did not lodge a 'losses schedule' although are required to do so
- requests for additional time for loss transfer agreements.
Compliance results
Due to law changes resulting from the review of income tax self assessment (ROSA), the government provided additional funding for the Tax Office to increase its risk assessment and active compliance focus on revenue losses.
For the 2007-08 income year, in the large market 24 reviews and two audits were completed resulting in a reduction in tax losses of $332.7 million.
In SME the focus, for the last two years, has been on the top 150 high risk loss taxpayers and other taxpayers with large carried-forward losses, resulting in a reduction in tax loss of $743 million for 2007-08. This financial year (year to date) we have completed 55 reviews/risk assessments that have resulted in tax and capital loss adjustments of $48 million and $18 million respectively.
Loss schedule changes
The 2009 Losses and Consolidated Groups Losses Schedules will be amended as follows:
- Part E - Foreign source losses will be replaced with a new part that aligns with the new legislation.
- Inclusion of a loss reconciliation statement that will assist taxpayers in correctly reconciling the losses they bring forward from prior income years with the losses they carry forward to later income years.
Foreign Losses
As a result of recent changes to the law, foreign losses are no longer quarantined from domestic assessable income (or from assessable foreign income of a different class). We are seeing that businesses that have links to overseas companies are trying to shift losses from overseas enterprises in to Australian enterprises. However if the business resides in Australia, they are only able to claim expenses that occur in Australia, not any that are made outside of Australia. The relevant section is 8 (1).
Taxpayer Alert 2008/18 talks about this issue in relation to branch and head office transfers. There seems to be an assumption of liability by the Australian business using offshore business losses. Even though quarantining of losses has been removed by government, this does not apply to controlled foreign companies; hence losses cannot be transferred to the Australian entity.
The media release and alert for the loss shifting:
The Tax Office is closely monitoring the impact of these changes and, in particular, any disclosure of foreign losses not previously reported. As part of this monitoring process, LB&I will undertake a survey of the some of the large corporates to gauge the impact of both the current global financial/economic crisis and the changes to the foreign loss rules.
1. 2007IY data is not complete. As at 2 September 2008, approximately 92% of anticipated lodgements have been processed.
Individuals
The Tax Office has identified that there continues to be a significant compliance risk in relation to non-reporting or the incorrect calculation of capital gains or losses amongst individual taxpayers.
Sections within 5. CGT and Losses Compliance Report
Last Modified: Friday, 21 May 2010