Company tax rate stays fixed but some small businesses will benefit from the new loss carry-back tax scheme.
If you are a business owner the new budget unveiled last month will probably have come as a bit of a disappointment.
Indeed, the hoped for reduction in the overall corporate tax rate from its current 30% to 29% turned out to be a mirage after all. The government effectively chose to jettison it for the more targeted, not to say cheaper, option presented by its the loss carry-back measure.
This new scheme, operative from July 1st 2012, would allow a business, irrespective of size, to claim a refund of tax paid in the previous two years against a loss in revenue in the third year.
For example, if a shop selling tourist goods made a profit in its first couple of years of operation and paid $300,000 in taxes on its earnings, but then found itself in difficult financial straits the following year, say, because of a decrease in the tourist market, it would be able to get a refund of the money it had previously paid to the tax office.
The loss carry-back measure aims to minimize the cash flow pressure undergone by companies that suddenly find themselves in the red after a period of profitable business.
This said, it is essential to note that the losses eligible to be carried back under the measure would be capped at $1 million of lost revenue. In other words, given the company tax rate remaining unchanged at 30%, the maximum amount of refunded tax would be $300,000. Furthermore, the scheme would only apply to a business that is structured as a corporation, leaving quite a few small companies out of the loop.
Also, the scheme may not make the tax refund available if the profits gained in the previous year have been distributed to the company’s shareholders as franked dividends on which tax has already been paid, a distinct possibility in numerous cases.
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