Losing my Losses: Are the loss restriction rules applying to Australia's tax transparent companies adequate?

Abstract

It has been argued that the Australian government prefers an entity tax approach for business forms providing member(s) with limited liability and separate entity status. This contrasts a number of foreign jurisdictions that have provided tax transparency to such business forms ('tax transparent companies'), with income and/or losses directly allocated to members for tax purposes. Examples of foreign tax transparent companies include S Corporations and Limited Liability Companies in the United States, Limited Liability Partnerships in the United Kingdom; and Loss Attributing Qualifying Companies and new limited partnerships in New Zealand.

A reason for the Australian government's preference is that unfettered access to tax losses by limited members could distort investments. Nevertheless, recently the Australian government provided restricted tax transparency for Incorporated Limited Partnerships used for venture capital investments ('venture capital ILPs') and controlled foreign hybrid companies ('CFC hybrids'). To address distortion concerns there are restrictions applying to allocated losses through these Australian transparent companies. However, are these restrictions adequate? This article considers whether the loss restriction rules applying to venture capital ILPs and CFC hybrids are adequate by comparing them to rules utilised in foreign jurisdictions with a history of transparent companies. This article will conclude by considering whether sufficient 'losses are lost' to justify broadening the availability of tax transparency in Australia.