Loss carry backs return…

Company Loss Carry Back Now Law

As we have previously reported, in the 2020-21 Federal Budget measures, the Government announced that a temporary loss carry back for companies would be introduced.

And the good news is, the measures have now passed through parliament and come into law (via the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020, which received Royal Assent on 14 October 2020).

The Loss Carry Back Measures are Temporary

The loss carry back is available in the 2020-21 and 2021-22 income years for tax losses incurred in the 2019-20, 2020-21 and 2021-22 income years.

Please note that the loss carry back for the 2019-20 income year (being last year) can only be claimed in the 2020-21 income tax return (so the tax return for this current financial year, which won’t be able to be lodged until after 30 June 2021).

This is because the announcement by the Government was only made in October 2020, after the end of the 2019-20 year.  And therefore given many companies will have already prepared and lodgement their returns for that year, the Government was unable to start the claiming of losses until tax time 2021!

The following table illustrates the relevant years where the loss carry back provisions operate –

Year Income Tax PaidYear Tax Losses Incurred
2019-202020-212021-22
2018-19AvailableAvailableAvailable
2019-20AvailableAvailable
2020-21Available

Loss Carry Back Results in a Tax Refund

If a loss is carried back, a refundable tax offset (creating a potential cash refund) will apply to either the 2020–21 or 2021–22 tax return.

However despite the allure of an immediate refund, the decision to carry back losses is a choice (i.e. it is not mandatory), and therefore eligible entities that incur eligible losses will get to decide whether to carry back the losses to prior years, or continue to carry them forward for use in future years.

Loss Carry Back Eligibility

To be eligible for the loss carry back, an entity must satisfy all of the following broad requirements:

1.   the entity is a corporate tax entity during the relevant income years – to confirm, a corporate tax entity includes a company (private or public), a corporate limited partnership or a public trading trust.  This means the loss carry back is not available to sole traders, partnerships and trusts,

2.   the entity carries on a business and has an aggregated turnover of less than $5 billion – If your company invests passively, the loss carry back will not apply, and

3.   the entity has lodged the tax return for the current year and each of the five years immediately preceding it, except where the entity is not required to lodge a return for that particular year – this is an interesting requirement, though not unexpected given some of the rules that applied to the Cash Flow Boost.  The Government are making it very clear, those who do not keep their reporting and lodgement obligations in order, will not be able to benefit from stimulus measures introduced in response to the global pandemic!

Restrictions on Which Losses Can be Carried Back

Broadly, the following losses cannot be carried back:

1.   capital losses (ie. only income losses can be carried back)

2.   losses which were incurred in a company that is new to a corporate group, and

3.   losses which arose as a result of excess franking offsets.

Working Out the Loss Carry Back Tax Offset

An entity’s loss carry back tax offset is worked out using the following method:

Step 1: Work out the amount of the loss to be carried back

Step 2: Reduce the step 1 amount by net exempt income

Step 3: Convert the step 2 amount to a tax equivalent amount

Step 4: Work out the amount of the loss carry back tax offset component for an income year – The company’s loss carry back tax offset component for the income year is so much of its income tax liability for the income year (applicable prior year) as does not exceed the Step 3 amount.

Further, the amount of the loss carry back tax offset is limited to the lower of the following amounts:

1.    the entity’s income tax liabilities for the 2018-19, 2019-20 and/or 2020-21 income years (calculated as above), and

2.    the entity’s franking account balance (representing total tax paid in the past less tax credits passed on to shareholders via dividends) at the end of the current year.

Loss Carry Back Planning Opportunity Utilising Other Stimulus Measures

Potential worth noting, the loss carry back provisions can be used in conjunction with the temporary full expensing of assets (basically the instant asset write-off in its extended form, and new name).

This is illustrated in the following example adapted from the Explanatory Memorandum –

After the 2020-21 Federal Budget announcement, XYZ Pty Ltd acquired plant & equipment costing $100,000 to be used in its business.  Under the new, temporary expensing measures, the company can claim the full cost as a tax deduction in its 202-21 income tax return (instead of having to depreciate it over several years as in the past).

As it turns out, this large tax deduction actually results in the company making a tax loss for the year of $50,000.

The company had a taxable income of $200,000 in 2019-20.  Therefore, it paid tax of $55,000 (at the applicable company tax rate that year of 27.5%).

It also has a Franking Account balance of $100,000.

XYZ Pty Ltd can therefore choose to carry back the tax loss in 2020-21 to the 2019-20 year.

Based on the calculation method above, the loss carry back tax offset component is $13,000 ($50,000 x 26%, being the company tax rate applicable to this year).

As this amount ($13,000) is less than the company’s income tax liability for the 2019-20 year (being $55,000 as above) and it is less than its Franking Account balance ($100,000) the company’s loss carry back tax offset, and therefore refund for 2020-21 will be $13,000.