The Australian Taxation Office (“ATO”) has recently provided a timely reminder to startups (and established businesses for that matter) in relation to the recoupment of tax losses with an active stance being taken by the ATO to review losses generated during the GFC.
There are tax rules that govern as to whether tax losses can be carried forward and offset in the future against tax profits. These rules vary depending on which structure you are using to undertake your business venture. “The rules were implemented to prevent loss trafficking i.e. to prevent someone from benefiting from losses initially generated by an unrelated business. However, as it is the case with Australian tax provisions, the application is wider and there are unintended consequences for businesses,” says Yanese Chellapen, Director of Machel Advisory Services.
Startups are more at risk with the latest ATO crackdown given their early development stage. Startups may be trading in the red for the first couple of years because they are generating no or insignificant revenue and therefore will likely have tax losses. Also, startups will have non-recurring costs in their preliminary stages (for instance development costs) that will contribute to them generating a tax loss.
“The losses rules can be easily breached. For instance, imagine a business venture with a fantastic business concept needing capital to grow the business and offering 51% of the company. In this scenario, the business can wave goodbye to its losses unless the business is considered to be carrying on the same business. The latter is even harder to satisfy when you are an emerging business. Your chances are very slim given that the business will morph in so many different aspects (for instance adding employees, start expanding interstate or adding a new business line). Businesses will need to keep an eye on their equity raising activities, recapitalisation initiatives (predominant post GFC) and any M&A that they may be involved in,” provides Yanese Chellapen.
Yanese adds “that businesses may have an unexpected tax leakage as a result of their tax losses being wiped out which may impede on their cash flow or even their distribution policy.”
It is essential that there is ongoing monitoring to ensure that tax losses are available. However, businesses will need to be familiar with the trigger events and it is recommended that they liaise with their tax advisors to tackle this issue.
Machel Advisory Services is organising a back to basic tax losses seminar on 27 April 2011. For further details on the seminar, visit our events page:
Machel Advisory Services is a boutique business and tax advisory firm. Our focus is on providing strategic advice to businesses notwithstanding their business life cycle. Machel Advisory Services can assist in the structuring of a start-up, help with your business development while you are growing your business and assist you with your exit strategies. Seeking professional advice during the three phases (start-up, growth & consolidation and exit) is one of the many key ingredients for a successful venture.
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