As a part of the changes to the Federal budget as a part of the Covid-19 recovery for Australian business, a loss carry back measure was introduced to allow significant tax losses to be carried back to generate cash funds for eligible businesses.
What Is Loss Carry Back?
Loss carry-back rules allow businesses the choice to take advantage of utilised income tax payable in previous income years. It provides a tax offset which can reduce tax liability to zero. The amount of tax offset is dependent upon your company’s net exempt income, income tax liabilities and the surplus in your franking account.
The latest loss carry back measure will allow corporate tax entities with an aggregated turnover of less than $5 billion to carry back a tax loss for the 2020, 2021,2022 or 2023 income years and apply it against tax paid in a previous income year back to 2018-2019. The carry back tax loss can only be used once. You will need to consider each tax loss separately if your business has made more than one tax loss per year. The loss carry back is claimed when the business lodges its tax return.
Loss Carry Back Conditions
Not all businesses are eligible. Your business structure will affect if you can offset and claim the loss in the current year or need to carry forward the loss and claim a deduction for it in a later year. The company tax return form will be updated with additional labels to claim the loss carry back for the 2020-21, 2021-22 or 2022-23 income years.
| Year Income Tax Paid | Year Tax Loss Incurred | Year Tax Loss Incurred | Year Tax Loss Incurred | Year Tax Loss Incurred |
| 2019-20 | 2020-21 | 2021-22 | 2021-23 | |
| 2018-19 | Available | Available | Available | Available |
| 2019-20 | – | Available | Available | Available |
| 2020-21 | – | – | Available | Available |
| 2021- 22 | – | – | – | Available |
Some deductions are ineligible, such as:
- donations, gifts or personal super contributions
- losses due to illegal business activities
- payments of pensions, gratuities or retirement allowances to employees, former employees or their dependents
- payments made under conservation covenants
Eligibility
Broad requirements need to be satisfied to be eligible. The entity must be a public or private corporate tax entity, a corporate limited partnership or a public trading trust in the relevant years (2018 – 2023). Sole traders, partnerships and trusts are not eligible.
The entity must have an aggregated turnover of less than $5 billion. Passive investments will not apply.
The entity must have lodged a tax return for the current year and each of the five years immediately preceding it (if it was required). You must have your reporting and lodgement obligations in order to be able to benefit.
Capital losses, losses from which were incurred in a company that is new to a corporate group and losses which arise from excess of franking offsets are not eligible.
Pro Tax Tip: The Loss carry-back can be used in conjunction with the temporary full expensing of assets under the instant asset write-off’s extended measurements.
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Benefits
One of the key benefits of carrying back a tax loss is that it can be used to increase cash flow, bringing forward the cash flow benefit of the losses rather than having to wait for taxable profits in future years.
Sole Traders and Partnerships
As a sole trader or partnership you may be able to offset your business losses against other assessable income, such as salary or investment income, in the same income year. To do this, you must meet at least one of the non-commercial eligibly criteria:
- Your business is a primary production business or a professional arts business and you make less than $40,000 from other sources in an income year
- Your individual income is less than $250,000 and either your assessable business income is at least $20,000 in the income year, your business produced a profit in three out of five years (including this year), your business hold real-estate at least $500,000 which is used to generate income and if your business uses certain other assets excluding motor vehicle worth at least $100,000 on a continuing basis.
You’ll need to have your expenses and record keeping in order. Every expense must be business-related and correctly apportioned between business and private use and are true and correct. You can defer the loss or carry it forward to future years if you don’t meet any of the non-commercial business loss requirements.
If partnerships claim a tax loss, each partner will need to have a proportionate share of that loss and treat it like any business activity.
Trusts cannot distribute any tax loss to the trusts beneficiaries. The loss must be set aside and used against future net income. They are lost if a trust terminates before being used. Trust loss rules for fixed trusts, non-fixed trusts and excepted trusts are different.
If your business has sustained losses and you’re not sure what to do, and ITP Accounting Professional will help discuss if the loss carry back can benefit you, or if there are better options available for you. They will also review your businesses current and future tax position and offer key, beneficial advice. It is always advisable to speak to your accountant before making any major business decisions.