SMEs carrying losses forward targeted by ATO

SMEs intending to carry forward losses are being targeted by the Australian Taxation Office as part of its compliance program, fearing businesses could incorrectly calculate their tax liabilities.

Letters have been sent by the ATO during this month to SMEs with revenue of between $2 million and $10 million, with about 250 tax practitioners contacted representing 350 clients.

Businesses realising a loss are permitted to carry that loss forward. But the ATO is concerned over the higher number of businesses likely to calculate a loss due to the downturn, saying many could make mistakes in calculating their tax liabilities.

“The letters include information about how carried forward loss provisions operate and highlight areas of concern,” the ATO said. “They aim to help you and your business clients and improve voluntary compliance.”

“Using carried forward losses is just one area where compliance issues arise. We will be reinforcing the need to ensure businesses satisfy the ‘continuity of ownership’ or ‘same business’ tests.”

Marc Peskett, partner at accounting firm MPR Group, says businesses wanting to realise a loss must first satisfy those tests.

“When you incur a tax loss you are allowed to carry that forward and offset that against any taxable income that you may earn. However, you must satisfy the two tests, and the first is the continuity of ownership.”

Peskett says the test refers to the structure of a business, and specifically deals with shareholder structures.

“If you want to write of a loss, the ownership of the business must be 50% the same compared to when the loss was actually incurred. And if you don’t meet that test, then you go on to the ‘same business test’.”

“The ‘same business’ test basically states that you must be carrying on the same business as you did when the loss was incurred. So you can’t be running a car sales shop, make a loss, then change your business and then write off the loss from when you were selling cars. The ATO is basically saying there are businesses doing that that are not satisfying those two tests.”

Peskett recommends businesses which receive letters from the ATO contact their tax advisor and make a plan from there to avoid incurring any unnecessary penalties.

“Generally the letter will come through to that tax advisor in the first place, and then they just need to contact the tax office to see what the business needs to do. The concern, really, is that businesses are making losses that aren’t real, incorrectly calculated and are even made up.”

“They just want to validate your losses, and see whether your business validates those two tests.”