Loss Carry back

Sep 2021 3 Minutes

Loss Carry Back Tax Offset (“LCB”)

To carry back or not to carry back, that is the question!

The temporary loss carry back rules allows corporate tax entities to carry back losses to earlier profitable income years as far back as the 2018-19 income year to generate a refundable tax offset.

The rules are limited to corporate tax entities that:

  • Are a small business entity in the loss year or would have been a small business entity if the aggregated turnover threshold was $5 billion;
  • incur a tax loss in the 2019-20, 2020-21 or 2021-22 income years; and
  • have a profit in a relevant previous year as far back as the 2018-19 income year.

Eligible entities may obtain an offset by choosing to carry back losses to earlier years in which there were income tax liabilities.  The choice to claim a loss carry back tax offset means that rather than carry forward tax losses for recoupment in future years, it chooses to carry back the loss and obtain a refundable tax offset in either the 2020-21 or 2021-22 income year.

As it is a refundable tax offset, it may result in a cash refund, a reduced tax liability or a reduction of a debt owing to the ATO.

The Government announced the extension of the temporary loss carry-back rules for another year to 30 June 2023. The rules were initially announced in the 2020 Federal Budget – we note at the time of writing this, the extension has not been legislated.  

 

Avoid Mistakes When Claiming Loss Carry Back

The ATO has provided some guidance in common errors with recent claims for LCB.  They are as follows:

  • Calculation of the tax offset – To calculate the tax offset you need to use your tax rate in the income year in which you made the loss (for the 2021 year that rate is 25% for Base Rate Entities).
  • Use the correct income tax liability amount – The amount of your tax offset cannot exceed their income tax liability for the income year you are carrying the loss back to.
  • Franking account balance – The amount of your tax offset cannot exceed your franking account closing balance at the end of the claim year.
  • Complete all mandatory labels within tax return – If you choose to claim the LCB, it's important that we complete all of the required LCB labels within the tax return.

 

The “Forgotten” Integrity Rule

Where companies wish to recoup prior year losses, they are subject to integrity rules, these being either the Continuity of Ownership Test or the Business Continuity Tests. You need to be mindful the same integrity rules apply to companies that choose to carry their losses back to obtain a tax offset.

 

Key Takeaway

To carry back or not to carry back.  As LCB is optional, careful consideration should be given prior to simply choosing to carry back losses. Like many areas of tax, does going down a particular path result in an inadvertent tax impact down the track. One example being, utilising LCB may result in the inability to pay franked dividends in the future.

That being said, the Government’s goal in providing temporary tax incentives can be achieved via the use of LCB.  Navigating through the LCB rules and choosing to access the LCB provides the ability for businesses to increase business cash flow by generating a tax refund.

If you would like to discuss any of the above further, please contact Iggy Moro.