Loss carry back rules for companies

The loss carry back rules for companies which were announced in the 2020-21 Federal Budget are now law. The Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 (the Bill) received Royal Assent on 14 October 2020.

Which entities are eligible?

Companies which carry on a business and have an aggregated turnover of less than $5 billion are eligible for the loss carry back. Aggregated turnover includes the turnover of your connected and affiliated entities.

How does it work?

The loss carry back rules are optional and broadly give companies an option to carry back their tax losses to an earlier year and claim a refund for tax paid in a previous income year.

Losses incurred in the 2019/20, 2020/21 and 2021/22 income years can be carried back to the 2018/19 and later income years.

The refund is claimed in the company's 2021 or 2022 income tax return.

How much can you receive if eligible?

Where tax losses are carried back, it will give rise to a tax offset.
The refundable amount of the tax offset is restricted to the lesser of:
 
  • the tax paid in the earlier year
  • the company’s franking account balance at the end of the current income year

Example – how it works

ABC Pty Ltd (ABC) had taxable income of $1,000,000 in the 2018/19 income year and paid $300,000 in income tax during the year. ABC is a large business and has a tax rate of 30% (i.e. it is not a base rate entity) and its franking account balance is $600,000 at the end of the 2020/21 income year.
 
ABC will have the following tax losses because of COVID-19:
 
  • 2019/20 income year – $300,000
  • 2020/21 income year – $600,000
When ABC lodges its 2020/21 income tax return, it chooses to carry back losses of $900,000 as follows:
 
  • 2019/20 loss of $300,000; and
  • 2020/21 loss of $600,000.
On lodgement of the 2020/21 return, ABC will be entitled to a tax refund of $270,000 (i.e.$900,000 x 30%) as this amount is less than the tax paid in the 2018/19 year and its franking account balance.
 
 
For base rate entities (companies with aggregated turnover of less than $50 million and 80% or more of its income derived from defined passive sources), the offset amount is calculated as follows:
 
  • Losses incurred in 2019/20 – the offset is calculated at 27.5%
  • Losses incurred in 2020/21 – the offset is calculated at 26%
  • Losses incurred in 2021/22 – the offset is calculated at 25%
Therefore, if we use the example above, during the 2020/21 income year, ABC’s tax offset would be $238,500 if it were a base rate entity:
 
  • 2019/20 income year – $82,500 ($300,000 x 27.5%)
  • 2020/21 income year – $156,000 ($600,0000 x 26%)
 

Example – Restricted to tax paid previously

DEF Pty Ltd (DEF) had taxable income of $250,000 in the 2018/19 income year and paid $75,000 in income tax during the year. DEF is a large business and has a tax rate of 30% and its franking account balance is $600,000 at the end of the 2020/21 income year.
 
DEF will have the following tax losses because of COVID-19:
 
  • 2019/20 income year – $300,000
  • 2020/21 income year – $600,000
Although the tax offset could be $270,000 ($900,000 x 30%), when DEF lodges its 2020/21 income tax return, the refund will be restricted to $75,000 as that is how much tax was paid in 2018/19. 

Therefore, DEF will carry back $250,000 in tax losses to claim a refund of $75,000 ($250,000 x 30%) and the remaining unutilised losses of $650,000 ($900,000 - $250,000) will be carried forward to the following income year and can be deducted in future years subject to the company satisfying the tax loss provisions.
 

Example – restricted to franking account balance

XYZ Pty Ltd (XYZ) had taxable income of $1,000,000 in the 2018/19 income year and paid $300,000 in income tax during the year. XYZ is not a base rate entity and its tax rate is 30% and its franking account balance is $150,000 at the end of the 2020/21 income year.
 
XYZ will have the following tax losses because of COVID-19:
 
  • 2019/20 income year – $300,000
  • 2020/21 income year – $600,000
Although the tax offset could be $270,000 ($900,000 x 30%), when XYZ lodges its 2020/21 income tax return, the refund will be restricted to the franking account balance of $150,000.
 
Therefore, XYZ can carry back $500,000 in tax losses to claim a refund of $150,000 ($500,000 x 30%) and the remaining unutilised losses of $400,000 ($900,000 - $500,000) will be carried forward to the following income year and can be deducted in future years subject to the company satisfying the tax loss provisions.
 
 

In conclusion

The real cashflow benefit of these provisions will only be received when a company lodges its 2020/21 income tax return which is not due for many months. This may prove difficult for companies who are spending money acquiring assets to take advantage of the temporary full expensing of depreciating asset provisions.

It is not mandatory for a company to carry back its income tax losses. In practice the company may want to continue paying tax e.g. in situations where they may wish to generate sufficient franking credits to issue fully franked dividends to their shareholders.

Lastly, there are integrity measures that have been put in place to ensure companies do not enter into schemes to obtain the tax offset.

Contact your Moore Australia advisor today for more information.