Planning2, Walker Wayland

Dec 2020 4 Minutes

Loss Carry Back for Companies

As part of the 2020-21 Federal Budget measures, the Government announced that a temporary loss carry back for companies would be introduced. The proposed measure has now become law.

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. This is a choice and eligible entities must make the choice when they lodge their income tax returns.

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

  1. the entity is a corporate tax entity during the relevant income years (e.g. from the income year the loss is carried back to the current income year);
  2. the entity carries on a business and has an aggregated turnover of less than $5 billion; 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.

 

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.

The following losses cannot be carried back:

  • losses which have been transferred between companies in the same foreign banking group;
  • losses which have been transferred by a joining entity to the head company of a consolidated group; and
  • losses which arose as a result of excess franking offsets.

 

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

  • 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 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 using the method statement); and
  2. the entity’s franking account balance at the end of the current year.

 

The following table illustrates the relevant years where the loss carry back provision operates:

Year Income Tax Paid Year Tax Losses Incurred
2019-20 2020-21 2021-22
2018-19 Available Available Available
2019-20 - Available Available
2020-21 - - Available

 

Please note that the loss carry back for the 2019-20 income year can only be claimed in the 2020-21 income tax return. This is because the announcement was originally made in October 2020 where the 2019-20 income tax return form for companies had been issued and some eligible entities may have lodged their returns for that year.

The loss carry back provision can be used in conjunction with the temporary full expensing of assets. This is illustrated in the following example adapted from the Explanatory Memorandum:

After the 2020-21 Federal Budget announcement, ABC Corporation decided to purchase plant equipment for $500,000 to be used in its business on 1 December 2020. Under the temporary full expensing measure, ABC Corporation can claim the full cost of the plant & equipment in the 2020-21 income year. As a result, ABC Corporation makes a tax loss of $150,000 for the 2020-21 income year.

ABC Corporation had taxable income of $2 million and an agregated turnover of less than $50 million in the 2019-20 year. As such, the company's corporate tax rate for that income year was 27.50%. It paid income tax of $550,000 in that income year. The company had no net exempt income in that income year.

The company's franking account balance at the end of the 2020-21 year was $1.3 million.

ABC Corporation can choose to carry back the tax loss of $150,000 incurred in the 2020-21 income year to the 2019-20 income year. Based on the method statement, the loss carry back tax offset component is $39,000 (being $150,000 x 26%). As this amount is less than the company's income tax liability for the 2019-20 income year ($550,000) and its franking account balance for the current year ($1.3 million), the company's loss carry back tax offset component for the 2019-20 income year in $39,000.

Therefore, when ABC Corporation lodges its income tax return for the 2020-21 income year, it will be entitled to a refundable loss carry back tax offset of $39,000.

If you have any queries about the loss carry back provision for companies, please contact Jane Chiang.