Almost a year ago, the federal government realised it had made a big mistake.
The error related to a tax law amendment first flagged by the Howard government in 2005 and introduced by the Rudd government in 2010.
The changes to income tax law affecting consolidated groups were in theory supposed to make it easier for companies involved in takeovers to account for their losses.
Australia’s biggest companies naturally went to the nation’s top accounting firms for the best advice on how they could maximise this in their tax returns.
The problem for the government, it turned out, was that it hadn’t anticipated massive claims as a result of the tweak to its tax laws.
There was some difference between business and bureaucracy on the interpretation of some of the technical details. And so by March last year, the government was potentially facing billions in tax claims and massive hole in the budget.
With all eyes on that promised surplus in 2012-13, the federal government moved quickly, and in November introduced retrospective legislation to stop companies exploiting a loophole in the laws.
It was a move that made the government and its advisers in Treasury and the Australian Taxation Office look silly, since there had been years of consultation on the original amendments. It also angered much of the business world, which may now have to reassess big deductions made in previous years.
If there’s one key issue that the Institute of Chartered Accountants wants addressed it’s to better resource policymakers to prevent future errors like this from happening.
“[The retrospective government legislation] presents a number of challenges for businesses that have complied with the laws,” says the tax counsel at the Institute of Chartered Accountants in Australia, Yasser El-Ansary. “They have complied with the obligation in good faith, the law was black and white and now the government’s come in and pulled the rug out from under taxpayers by amending the legislation.
“It presents real challenges for corporates; for the chief financial officers and finance directors who now have to explain this decision to their CEO and board.”
El-Ansary says the backflip is not due to incompetence but “chronic underinvestment in resources within Treasury’s revenue group ... They’re the arm of bureaucracy that’s responsible for policy development and legislation that raises revenue. An underinvestment in such a fundamental area is a recipe for disaster. That’s why we’ve made [funding Treasury] our headline priority in our pre-budget submission.”
He say’s the government’s expectations of a 2.5 per cent efficiency dividend across all the public service – which basically means a 2.5 per cent cut – is “a major hazard and will mean policy failures down the track”.
Other industry groups have also started sending in their budget wish-lists, and not surprisingly, tax is a big item.
The Institute of Public Accountants (IPA) wants a new tax regime giving small business a lower rate of tax. Its submission suggests small businesses be given a tax offset, which could be funded by the removal of a number of small business tax concessions.
The IPA also wants the government to throw a bone to small businesses in turbulent economic times by allowing them to offset losses from tax they paid in previous years. The government’s recently appointed Business Working Group is considering it, but the IPA says the availability of loss carry-back arrangements may be restricted to small businesses initially “if budgetary constraints do not allow for an extension of such a measure more broadly”.
“[It] would be particularly beneficial for small companies under financial stress,” the submission says. “Other countries provide such relief as part of their tax system, which provides an automatic stabiliser during downturns.”
The ICA’s El-Ansary says depending on resources, the loss carry-back measure could be capped for businesses with turnover of less than $10 million. He says it’s a crucial measure needed in the current economic climate. “A loss carry-back regime, if properly designed, could help countless small businesses in accessing finance without having to turn to financial institutions. They would be able to use their own money.”
Critics argue that such a move would transfer private sector risks to the public sector. But El-Ansary says that small businesses have low bargaining power in being able to negotiate favourable terms with banks during downturns.
Australia’s largest accounting body, CPA Australia, has turned its focus on the government’s ambitious plan to prepare for the “Asian century”.
The CPA, which has more than 25 per cent of its members working in Asia, wants the government to help export-ready small businesses in Australia build networks with their counterparts in Asia.
As part of its 2012-13 pre-budget submission it suggests the government improve links via exchange programs and “professional advisers”.
CPA Australia chief executive Alex Malley says the government needs to be prepared to invest at least $30 million for small business, even if that means putting the budget into deficit.
He says the government could also get the support of Austrade to develop an “Asia Enterprise Centre” that would facilitate exchange programs.