Mark Molesworth

The Government has written an election manifesto dressed up as a budget as it looks ahead to the double dissolution on 2 July.

“A year ago there was a lot of optimism that this budget might begin the process of genuine tax reform, but political expediency has reduced it to more tinkering at the edges,” BDO Tax Partner Mark Molesworth said.

“This is very much a budget from a Government whose first, second and third priorities are to get re-elected.

“It’s now more than a decade and a half since our tax system has seen any meaningful reform and it’s hard to feel too positive about the chances of anything significant occurring in the near future.”

Mr Molesworth said although measures like further cutting taxes for small business, winding back superannuation concessions, and progressively moving the corporate tax rate to 25% were positive, they didn’t do enough to address the broader structural issues facing Australia’s tax system.

“Providing further tax relief to small businesses – and raising the eligibility for that relief to turnover of up to $10 million is admirable, but a more holistic approach to tax could have achieved so much more,” Mr Molesworth said.

“Certainly no business is going to say no to a tax cut, but that doesn’t mean we haven’t missed an opportunity to truly address the way our tax system holds business back.”

Mr Molesworth said while some of the Government’s changes to reduce superannuation concessions were positive, others will disadvantage those who have planned their retirement around the existing rules.

“Limiting the amount of pension assets to $1.6 million is understandable,” he said.

“But lowering the concessional contributions cap to $25,000 and introducing a lifetime cap on non-concessional contributions to $500,000 will be huge blow to many who are close to retirement, especially given the lifetime cap is being backdated to 2007.”

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Mark Molesworth

BDO Tax Partner Mark Molesworth has cautiously welcomed draft legislation aimed at addressing issues with some companies carrying forward and claiming income tax losses.

This is an issue particularly faced by early stage companies (especially those focussed on innovative products and services) that frequently experience significant changes in shareholders in the early years of their existence in response to continuing capital needs, which has previously resulted in them failing the 50% continuity of shareholders test.

Mr Molesworth said the Government’s response was a step in the right direction, but that problems still remain.

“The existing same business test is very restrictive and can lead to the stifling of innovation in order to ensure that existing losses remain available,” he said.

“Any steps to liberalise the same business test would be good for the economy and for taxpayers.

“However, the means by which this has been done may increase compliance costs for such businesses and may not have the desired effect.

“In particular, the requirement that changes made to the business are ones that would be reasonably expected will mean ATO officers (and taxpayers) will need to obtain evidence of what such businesses would do.

“This requires either a large degree of business experience – which ATO officers may not have – or a potentially expensive and time consuming evidence collection exercise. Furthermore, what others may (or may not) do may not necessarily be relevant to assessing the outcomes for a particular company’s circumstances.

“It may make the task too hard or too costly and lead businesses down the path of least resistance – don’t innovate and be certain the losses remain available.”

Background

In order to claim losses from past years against current year income, a company must have more than 50% continuity of shareholders. Where this continuity of ownership test is failed, under the current test a company must:

• Carry on the same business; and
• Not derive income from a new business or new kind of transaction.
• Once it fails both of these tests, the past year losses are not available.

This is perceived as a problem for businesses focussed on innovation and continuing capital requirements in order to prove their products and services and grow. That is, they often make losses in the early years, get new investors and therefore fail the continuity of ownership test. The company may then move in a new (but related) direction. However, because the same business test requires an identical business and not merely a similar business, they often fail the same business test.

How the draft legislation responds The ED legislation tries to overcome this by saying that a company that fails the continuity of ownership test can continue to use its losses if it passes either:

• The existing same business test; or
• A business continuity test.

The new business continuity test requires that the continuing business be similar (but not necessarily the same) It focusses on:

• Whether the same assets are used before and after the change in ownership
• Whether the sources of income for the company are the same before and after the change in ownership •
• Whether the changes to the business (from before to after the change in ownership) are ones that would reasonably be expected from similarly placed businesses.

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The Advisory Panel draws together some of Australia’s leading taxation professionals who voluntarily contribute their knowledge and expertise. Its purpose is to assist the Board of Taxation in the general performance of its Charter and in advising the Treasurer on improvements to the general integrity and functioning of the tax system.

BDO in Australia’s National Chairman, Ms Helen Argiris, said Mr Molesworth’s reappointment highlights the esteem with which his expertise and industry insights are held by key tax decision makers.

“Despite membership of the Advisory Panel changing from time to time and being reviewed periodically, Mark has been a member of the Panel since 2013,” Ms Argiris said.

“This long standing appointment cements his position as one of the country’s leading taxation experts and provides a valuable channel for Mark and BDO to ensure the tax reform agenda remains top of mind for Australian taxation authorities and regulators.

“Tax reform is a true passion for Mark, and this appointment is just one of many that allow him to ensure the interests of Australian taxpayers are continually kept top of mind when important taxation decisions are made at the highest levels.

“It is comforting to know that the Board will continue to benefit from having someone of Mark’s calibre on call to assist in achieving its goal of advising the Treasurer on improving the quality and effectiveness of Australia’s tax legislation.”

Mr Molesworth’s tax reform activities have seen him:

• Chair The Tax Institute’s CGT and Losses Technical Sub-committee
• Assist in drafting the Board of Taxation’s report on the Post Implementation Review of Division 7A as a member of the formal working party
• Consult to the ATO via The Tax Institute Private Groups Stakeholder Group
• Consult to the ATO via its SME Safe Harbour Working Group after the ATO approached him for the role
• Participate in the Board of Taxation’s consultations regarding the 64 announced but un-enacted measures, upon the request of the Treasurer.

Mr Molesworth is a direct taxation specialist (both here and abroad) with almost 20 years’ experience in working with taxpayers of all sizes and across a broad range of industries. His specialties include income tax law, FBT law, and the provision of support to clients subject to ATO audit or review.

He holds a Bachelor of Commerce (Honours) and a Bachelor of Laws (Honours), and is a fellow of The Tax Institute.

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