Tax Policy Lessons from Down Under

May 13, 2021

This week the Australian government released its latest budget proposal and two policies that stand out in its fiscal response to the pandemic should be helpful as the economic engine of the country turns back on. The first is full expensing for some investments and the second is the introduction of a loss carryback provision. The new budget takes both these temporary policies and extends them into 2023.

These are valuable policies for making the tax system workable for businesses that are struggling and for those that are ready to make new strides in growth. However, it would be better if they were permanent features of the Australian tax rules rather than temporary responses to the pandemic.

When a business invests in new assets, the costs of those investments are usually deducted over long periods of time. This reduces the value of those deductions, inflates taxable profits, and depresses investment activity.

In response to the pandemic, Australia made it easier for many businesses to immediately deduct the costs of their investments (full expensing). The policy applies to businesses with annual revenue of up to AUD $5 billion (USD $3.86 billion).

The budget documents suggest that 99 percent of businesses will be eligible and the provisions apply to around AUD $320 billion ($247 billion) worth of investment. The policy has been extended until June 30, 2023.

Full expensing lowers the costs of making new investments. Since new business investment will be critical to the next stage of the recovery, this policy helps to gear things toward growth.

The budget also provided more leeway for businesses to offset their taxable profits with the losses experienced in the pandemic. Prior to the pandemic, Australian businesses were unable to use losses in one year to offset taxable profits in prior years.

However, in response to the economic crisis, the Australian government introduced a temporary policy that allows businesses to use the losses they incurred during the pandemic to revise their tax liability in the prior year. If a business paid corporate taxes in 2019 but was facing a loss in 2020, it could revise its 2019 tax filing to claim the losses from the pandemic.

Like the full expensing policy, the loss carryback is only available to businesses with revenue of up to AUD $5 billion and has been extended until 2023.

For countries that are looking to boost investment and allow companies to recover from the losses they incurred during the pandemic, Australia provides a good example of the type of tax policy tools that should be used.

However, these should not just be temporary policies. Full expensing and loss carrybacks are important policies for a well-designed tax system. If these policies make sense in a time of economic crisis and recovery for the whole economy, then they also make sense for when individual companies face challenges of growth or unexpected economic shocks.

While the new Australian budget makes progress by extending these temporary policies, it would be even better if they became a permanent feature of the tax system.

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Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.