On 6 October 2020, as part of the budget the Government announced that eligible Companies (corporate entities) would be able to utilise a loss carry back.
What is a loss carry back?
Companies that previously paid income taxes in a relevant year and have subsequently made taxable losses can claim a refundable tax offset up to the amount of their previous income tax liabilities.
The maximum amount of the refundable tax offset that can be obtained in a year that the loss carry back offset is claimed is limited to the entity’s franking account balance at the end of the year in which the offset is claimed, and of course, the tax liability for the prior year(s) to which it is carried back.
Example 1: John Pty Ltd had a Income Tax liability of $10,000 in 2019. However, in 2020 John Pty Ltd made a loss of $35,000 and had a balance on their Franking Account of $20,000. As the Tax liability in 2019 was less than the Franking account of $20,000, John Pty Ltd would be eligible for the loss carry back of $10,000.
Example 2: John Pty Ltd had a Income Tax liability of $30,000 in 2019. However, in 2020 John Pty Ltd made a loss of $45,000 and had a balance on their Franking Account of $20,000. As the Tax liability in 2019 was higher than the Franking account of $20,000, John Pty Ltd would be eligible for the loss carry back of only $20,000.
What losses are eligible for carry-back?
Only tax losses (i.e. revenue losses) are eligible for the carry back. The following types of losses are not eligible for this carry back:
- capital losses
- tax losses that were transferred to or from companies in the same foreign banking group
- losses transferred to a head company of a tax consolidated group by a joining entity, and
- losses generated resulting from excess franking offsets.
Who is eligible?
Companies with less than $5 billion turnover in a relevant loss year can carry back losses made in the 2019–20, 2020–21 and 2021–22 financial years to a prior financial year’s income tax liability in the 2018–19, 2019–20 and 2020–21 financial years. A company must have taxable income in one or more of the prior income year(s) that is no earlier than the 2018-19 income year. Start-up companies or companies who have only generated tax losses during this period will not be eligible to claim the offset as they will have no prior income tax liabilities against which to offset losses.
The benefit of the offset is limited by the fact that tax losses cannot be carried back earlier than the 2018-19 income year. From a timing perspective, the offset cannot be claimed until the time of lodging the 2020-21 or 2021-22 income tax return (i.e. the claim year), even if the company generated a tax loss in the 2019-20 year and is seeking to carry it back to offset tax paid in relation to the 2018-19 year. It is not entirely clear as to the reason for delaying the ability to claim the offset for the first year, especially when cashflow is a primary concern for most businesses already adversely impacted by COVID-19. One assumption is to ensure that from an administrative perspective that the relevant company tax return forms can process & correctly account for the new offset.