The Australian tax system should be changed to allow business losses to be "carried back" and offset against tax paid in earlier years.This is the main recommendation of the Business Tax Working Group, which delivered its final report on the tax treatment of business losses to the Treasurer on Friday.The report said: "The working group considers that loss carry-back would be an important reform in the near term as it offers the prospect of improving incentives for investment as well as acting as an automatic stabiliser during an economic downturn."Loss carry-back allows companies to offset current period losses against previously paid taxes. It can be viewed as a limited form of loss refundability."Lenders are among those that stand to gain from such a reform. The poor cash flow situation that many companies suffer because of the current treatment of losses limits their ability to service debt.The Business Tax Working Group was established in response to last year's Tax Forum. Its ongoing brief is to look at how the tax system can be adjusted to best help business increase productivity and respond to a changing economy.The BTWG's view is that the current treatment of profits and losses is asymmetric - companies pay tax on earnings on an accruals basis, but the government does not pay the income tax value of losses on the same basis.It said: "The current tax treatment of losses can be seen as the government withholding its share of the cash flow impact of a loss, leaving businesses to bear the full impact of a loss in the year it is incurred. This cash flow impact can be detrimental to a business's future economic prospects, especially where the company requires short-term liquidity to meet day-to-day outgoings."One problem with this treatment is that in some cases these losses are never used. This creates a bias against risk-taking - tax paid as a proportion of taxable income can exceed the statutory rate of 30 per cent if losses are incurred.Under the BTWG's carry-back proposal, refunds would be limited to company franking account balances. The amount of losses available to be carried back would be subject to a cap of "not less than $1 million".  The cap would target the measure to small- and medium-sized businesses. To avoid the need for businesses to amend previous tax assessments it is proposed that loss carry-back be delivered through the use of a refundable tax offset.The carry-back period would be two years. The report said: "A two-year carry-back period would strike the right balance between limiting the exposure of government revenues and allowing companies to access the tax value of their losses. A limit reduces the administrative cost of storing, amending and auditing tax returns from previous periods."Loss carry-back periods could be amended to reflect the economic environment. This happened in the United Kingdom and the United States after 2008.The carry-back would be available to companies only (no sole traders, trusts or partnerships). The BTWG said extending the carry-back arrangement to trusts would not