Summary

As part of the broader assistance through COVID the Government introduced a loss carry back tax offset that allows companies to carry back tax losses from the 2020-2023 financial years to previously profitable years from 2019 resulting in a refundable tax offset.

The purpose of the scheme is to provide more immediate cashflow support to companies that previously paid tax but have found themselves in a loss position as a result of the impact of COVID.

In Detail

An eligible entity (see below) can choose to carry back tax losses it incurs in the 2020, 2021, 2022 or 2023 financial years and apply the loss against prior year tax liabilities from 2019 generating a refundable tax offset. The tax offset is included in the tax return for the loss year and generally refundable following lodgement of the tax return.

Carrying back the loss is an optional alternative to the normal carry forward rules so each eligible business would need to consider the benefit it may provide to them.

Eligible entities

An entity will be eligible for the loss carry back tax offset if it:

1. is a corporate tax entity (ie a company).

2. carries on a business

3. has losses from the 2020, 2021, 2022 or 2023 financial years.

4. had a tax liability in the 2019, 2020, 2021 or 2022 financial years.

5. has a turnover below $5 billion.

6. is up to date with its tax lodgements.

Eligible losses

An entity can’t carry back capital losses so this generally only applies to revenue losses of the company that haven’t already been used.

There are some additional restrictions for excess franking credits converted to losses and for consolidated groups so make sure you seek advice relevant to your circumstances.

Calculating the amount of the offset

There are a few steps that need to be undertaken to calculate the amount of the tax offset:

1. Work out the amount of the tax loss to be carried back (reduced by any exempt income) and determine which year(s) it will be carried back to.

2. Convert the loss amount into a tax equivalent amount using the tax rate in the loss year.

3. If the tax equivalent amount exceeds the franking account balance at the end of the loss year, the amount is limited to the franking account balance.

To illustrate the steps above, let’s take an example.

Assume Company A has a tax loss in the 2022 financial year of $100,000 and a franking account balance at 30 June 2022 of $30,000. Company A had a $200,000 profit in 2021 with a tax rate of 26% resulting in a tax liability in the 2021 year of $52,000.

Company A has a tax rate of 25% in the 2022 financial year.

Step 1 – Determine the amount of the loss to be carried back.

In this example Company A has chosen to carry back the 2022 tax loss of $100,000 to the 2021 year.

If Company A had made a profit and paid tax in the 2020 or 2019 financial years as well, Company A may choose to apply some of the loss against those years to get the best outcome. That can get complicated so we’ve left it out of this example but if you have multiple years with a tax liability you will want to seek advice on the most appropriate years to apply the loss against.

Step 2 – Convert the loss to a tax equivalent amount.

The amount of the loss carried back then needs to be converted into a tax equivalent amount using the tax rate in the year of the loss (2022 in this example). The tax equivalent amount for Company A is = $100,000 loss x loss year tax rate of 25% = $25,000.

Step 3 – Apply franking account limitation if required

Company A has a franking account balance at 30 June 2022 of $30,000 which is higher than the amount calculated at step 2 above of $25,000 so there is no reduction in the tax offset. Had the tax offset exceeded the franking account balance, the offset would be limited to the franking account balance.

The $25,000 tax offset should be refundable to Company A on lodgement of the 2022 tax return.

Other considerations

When deciding whether to apply the loss carry back rules a company should consider:

1. Whether the tax offset will give rise to a franking deficit in the year the offset is refunded.

2. Carry back vs carry forward. Companies should map out the benefits available under each scenario as changes to the corporate tax rate over these years may impact the amount of the offset.

3. The tax offset will give rise to a debit in the franking account which will be relevant when planning dividends for future years.

4. Companies on a payment arrangement for income tax or PAYG instalment debts may want to consider repaying these debts earlier to increase the franking account balance.