Cashing in on company tax losses

Loss carry back rules – a quick guide

Under new laws introduced by the Government, companies for a limited time are able to carry back tax losses when they file their FY21 or FY22 tax returns.

The new rules effectively allow a company to cash in on tax losses by obtaining a tax refund for tax paid in earlier years though some careful planning may be necessary for taxpayers to benefit from the new rules. This article provides a quick guide to some of the key considerations.

How many years can tax losses be carried back?

Company tax losses that are incurred either in the FY20, FY21 and FY22 income years can be carried back to reclaim tax paid for the FY19, FY20 or FY21 income years.

How is the claim made?

As mentioned, the claim is made as part of a company’s FY21 and FY22 tax return filing and the loss carry back is claimed in the form of a refundable tax offset.

The following example illustrates:
XYZ Pty Limited (XYZ) has taxable income of $1,000 in FY20 and paid tax of $275 in that year.

At the end of FY21, XYZ incurred a tax loss of $700 and its franking account balance was $275. Assume the relevant company tax rate in FY21 is 26%.

XYZ now wishes to use the $700 loss incurred in FY21 to offset its taxable income in FY20 of $1,000. This is achieved by calculating XYZ’s loss carry back offset entitlement.

XYZ calculates its loss carry back offset entitlement as follows:

The $700 tax loss is multiplied by the current year company tax rate of 26%. This equals $182 ($700 x 26%) and is referred to as the loss carry back offset component (LCBOC)
The LCBOC of $182 is then compared against the company’s franking account balance at the end of FY21 being $275 to determine which is the smaller amount
As the LCBOC of $182 is smaller than the company’s franking account balance of $275, the full LCBOC of $182 can be claimed as a refundable tax offset in XYZ’s FY21 tax return
Consequently, XYZ would receive a refund of $182 when it files its FY21 tax return for tax paid in FY20

Are there other key considerations to note?

Five other key considerations to note are:

Limited to companies
Companies¹ are only entitled to claim the temporary loss carry back offset and other entities such as sole traders, partnerships and trusts² do not qualify.
Franking account balance key
As noted in the above example, the amount of tax losses that can be carried back is limited to the company’s franking account balance at the end of the current claim year. It will therefore be important to monitor franking account balances where loss carry back is sought. Debits to the franking account such as dividend payments
(including dividend payments to meet any Division 7A loan repayment requirements) or R&D claims may restrict a company’s ability to carry back losses.
Limited to certain losses
Only revenue tax losses can be carried back. Other types of losses such as capital losses and transferred tax losses to a tax consolidated group cannot be carried back. The latter may influence certain corporate groups on whether or not to tax consolidate in the current year or for FY22. In addition any carried forward tax losses must still satisfy the existing loss recoupment rules (continuity of ownership and similar business tests).
Loss leakage
For companies with aggregated turnover of less than $50m, it is expected there may be some tax loss offset leakage as eligible losses are only carried back based on the current year corporate tax rate (e.g. 26% or 25%) which may be lower than an earlier income year where the corporate tax rate was higher (e.g. 27.5%).
Tax returns up to date
Income tax returns must be up to date in order to carry back tax losses. In particular, a company must have lodged an income tax return for the current year and each of the five years preceding assuming the company was in existence.

What are the takeaways?

A key takeaway is that if your company has tax losses or expecting to have tax losses incurred for the FY20, FY21 or FY22 income years, some pre planning may be
necessary. This would include franking account projections and projecting your company’s tax loss position to determine the availability of the loss carry back.

Consideration should also be given to whether the Government’s immediate asset write off concessions can be used to create tax losses in FY21 and FY22 which can then also be carried back under the new rules.

¹ Companies with aggregated turnover of $5 billion or more do not qualify for the loss carry back rules.
² Trusts that are public trading trusts and treated as companies for tax purposes can still qualify for the loss carry back rules.