Lift restriction on carry forward losses to help businesses

 

It is an axiom that the Covid-19 pandemic has taken a heavy toll on businesses. Apart from stimuluses, the government can provide further incentives to alleviate the cash flow challenges currently stifling the survival of businesses.

Currently, losses incurred by businesses can be carried forward and offset against future profits. This is one way of mitigating cash flow problems faced by businesses. The UK, Australia and Singapore permit losses to be carried forward indefinitely. However, in Malaysia, the rules were changed from indefinite to seven years, viz:

The ascertainment of total income under the Income Tax Act 1967 (ITA), subsection 44(5F) stipulates that adjusted losses as ascertained under either subsection 44(4) or 44(5) of the ITA shall only be deductible from aggregate income for a period of seven consecutive years.

The 2019 Budget further placed restrictions on group relief for losses. If you had a group of companies and one made a profit whilst the others incurred losses, you are still required to pay tax on the company that made a profit although overall the group might have made a net loss.

This is because the current legislation does not permit you to offset losses with the profits, with the exception of start-up companies, but then again for the first three years only, under strict conditions.

Businesses therefore haemorrhage unfairly, paying high taxes despite an overall net loss in the group.

In legislating, the government took a myopic view in thinking that business ventures are assured of making profits and not expected to make losses over a prolonged period of time, irrespective of changes in economic climate, force majeure or increases in costs of production.

It is possible that the government introduced this to primarily deter companies from running businesses as a hobby, only to recover from their folly by claiming tax refunds. Further, their rationale was that it is not possible for businesses to make losses for extended periods and still sustain themselves.

Without denigrating the policymakers in any way, the argument for restricting losses is flawed because:

• Businesses may now move and set their bases in neighbouring countries which permit losses to be carried forward indefinitely, which can be detrimental to our economy, and
• Many industries take longer than seven years to recover losses, for example, hotels, malls, mining, agricultural and construction projects, to name a few.

Impact of the Covid-19 pandemic

The outbreak of the Covid-19 pandemic has caused significant disruption and uncertainty to businesses and economies globally. This pandemic draws parallels to that encountered during the Great Depression of 1929 and the Spanish Flu of 1918, when an estimated one-third of the world’s population became infected with this virus with deaths of at least 50 million worldwide.

The markets took a long time to recover to their pre-crisis level because unemployment was rife and businesses struggled to keep open.

Does this sound familiar? Well, it is happening right now in Malaysia. It is going to be a slow and gradual process to bring it under control and get back on our feet. Businesses will need to move from responding to immediate challenges now, to the next horizon of building resilience in their operating models and looking beyond to ascertain how business should be conducted in a post Covid-19 pandemic world.

While we can contemplate and traverse through the challenges posed by this pandemic, it is unlikely that businesses will be able to get back to equilibrium or to the activity or capacity levels achieved by them up to and before the outbreak of this epidemic in the near future.

Change the legislation

How quickly Malaysia can recover from this pandemic is dependent on several factors. I have articulated one of the fiscal policies that can be adopted by the government to assist businesses. Companies are incurring colossal losses and it will take a long time before they become profitable. The need for change now is inevitable.

The government should therefore urgently:

• Repeal the legislation and permit business losses to be carried forward indefinitely as in other countries or to at least 20 years as in Canada.
• Remove restrictions on group company losses and permit offset not only for start-ups but for all companies to alleviate cash flow constraints (Benefits displayed in Appendix I below).
• Introduce new legislation to facilitate the carry back of losses for businesses. This measure allows eligible companies to accelerate the receipt of cash benefit associated with tax losses as practised in the UK and Canada and now introduced in Australia and Singapore. This could be an additional stimulus package at a time when most businesses are struggling to survive. (Benefits displayed in Appendix II below.)

Appendix I: Effect of Group Relief Provisions

COMPANIES WITHIN THE GROUP

• In reality, the group has made a loss but yet has to pay 120,000 in tax.

If amended

• No tax is paid and the remaining loss is available to be carried forward indefinitely instead of being restricted to seven years.

It is apparent from the above that the present legislation penalises companies in a group with a heavy burden of paying taxes, while in totality it has incurred a loss.

Appendix II: Effect of Loss Carry Back Provisions

Introduction of legislation to allow carry back of losses

This legislation will allow businesses to recover their losses earlier culminating in a tax refund that assists with their cash flow problems during the pandemic period. At the same time, the government will benefit in the future as losses carried back and utilised cannot be used to offset future profits, on which tax has to be paid back to the government.

 

Siva Nathan is a Chartered Accountant who has practised in the UK, Australia and Malaysia. He had previously advised the Inland Revenue Board and finance ministry on the Self-Assessment Tax System introduced in Malaysia. - FMT

The views expressed are those of the author and do not necessarily reflect those of MMKtT.