Lenders stand to make substantial gains in the form of improved cash flow for their business customers if the Government adopts a proposal to reform the tax loss system.
Following the Tax Forum, in October, the Government established a Business Tax Working Group to look at how the tax system could best help businesses increase productivity and respond to a changing economy.
The group has now produced
a paper on the treatment of tax losses. Treasury issued the paper yesterday and is taking submissions in response.
The paper highlights what it calls the asymmetric treatment of company profits and losses. 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.
Losses are carried forward to be deducted from future earnings.
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.
The current treatment also restricts business cash-flow, which can have a negative impact on a businesses' ability to access debt.
To fund acquisitions and business restructuring, companies may need to refinance existing debt or to obtain new sources of finance.
Revenues during the restructuring period may be less than in previous years, while costs may be higher.
The paper says: "These impediments to risk-taking, investment and innovation impose a cost on the economy through detracting from productivity growth."
Possible reforms outlined in the paper include allowing losses to be refunded on an accruals basis.
The working group also canvassed the introduction of a time-limited form of loss carry-back that would allow companies to offset losses against their previous year's earnings.
And it looked at applying an uplift factor to losses as they are carried forward so their real value is not eroded over time.