A company is a profit-making entity and its ideal financial position is to end each year with a profit. Inevitably, as it is in all business ventures involving risk-taking, you can also make a loss. Amidst the current challenging pandemic, it is more likely for most businesses that losses will be a more common scenario even if it is not an enviable outcome for most SME bosses. When you make a profit, you will have to pay corporate tax based on the chargeable income, being accounting profit adjusted for assessing the amount of tax payable. Unfortunately, when you ended up on the other side of the stick and make a loss, you do not get a tax refund immediately from IRAS. However, you will get this creature called “unutilised losses”, which could include all or any combination of three components: unutilised business losses, capital allowances (CA) or donations. The order of utilisation will be CA first followed by business losses/donation.
The utilised loss is useful in reducing tax liability in three ways. It is normally available to be used for the current chargeable income (against any non-trade income), for future chargeable income (losses carried forward) or for past chargeable income (losses carried backward).
Business losses against current non-trade income:
When a company with a principal activity in the selling and trading of computer products incurred a loss for the year with a tax losses, it can offset this business/trade/vocation/profession losses with any other income earned from interest, rental, royalties or other income not arising from its principal activity. Where it still have any untilised losses after offsetting these income, it can carried forward its losses and use it against future chargeable income or past chargeable income.
Business losses against future chargeable income (losses carried forward):
Unutilised business losses may be carried forward and deducted against subsequent income of a company, provided that there is no substantial change in the shareholding of the company – that is, that 50 per cent or more in shareholders and their respective shareholdings at the relevant dates have remained the same (the Substantial Shareholding Test). A sale of shares in third-party transactions may thus result in the Substantial Shareholding Test not being met. The two relevant dates will be the last day of the year in which the losses or donations were incurred and first day of the Year of Assessment in which the losses or donations are to be deducted. For utilised capital allowances, it will be further subjected to a business test to ensure that there is no change in its business activity as well as shareholding test for the 2 relevant dates: the last day of the year of assessment in which the capital allowances were claimed and first day of the Year of Assessment (YA) in which the unutilised capital allowances are to be deducted.
Business losses against past chargeable income (losses carried backward):
Unutilised business losses may be carried backward to deduct the chargeable income for the immediate preceding YA subject to the same shareholder test or business test as applicable. The relevant dates however will be different, it will be the first day of the year (or YA) in which the losses or donations were incurred (or capital allowances were given) and the last day of the immediate preceding YA in which the business losses or capital allowances are to be deducted.
To help businesses with their cash flow, it was announced in Budget 2020 and 2021 that the Loss Carry-back Relief will be enhanced for YA2020 and YA2021 by extending the carrying back from one to three years for YA2017 to YA2019 and YA2018 to YA2020 respectively under the ‘YA2020 and YA2021 enhanced carry-back relief’. These two tax reliefs will allow a company to elect to carry back its unutilised losses in YA2021 or YA2020 against any chargeable income in YA2020 to YA2018 or YA2019 to YA2017 respectively, subject to the same shareholder test (or business test) for the relevant dates with the earliest YA to be used on a first-in-first-out basis against any unutilised losses. The amount of unutilised losses that can be deducted is subjected to a maximum capping of $100,000 each for YA2021 and YA2020.
So, taxpayer do have an alternative to elect to exercise its right for tax refunds. Specifically if the carry-back relief is applicable. Otherwise, it will just have to wait for the light of a profit in the future to monetise it in the form of lower future tax liability.