As part of the Federal Government’s COVID-19 related economic recovery and tax incentives, the Government introduced a corporate loss carry back tax offset into the Income Tax Assessment Act 1997.
The loss carry back tax offset essentially allows corporate entities to “carry back” tax losses in their 2021, 2022 (and 2023 year based on recent Government announcements but not yet passed as law) tax returns to offset profits and tax paid as far back as the 2019 tax year. This provides a mechanism to apply for a refund for tax paid in prior years as a tax offset if there is a tax loss in more recent years (i.e. FY 2020, 2021, 2022 and 2023).
The loss carry back measure rules apply to corporate tax entities that have aggregated turnover of less than $5 billion in the relevant loss year.
Under the loss carry back measure, a corporate entity is able to choose to carry back income tax losses. Capital losses are not eligible for the carry back tax offset benefit.
How to calculate the loss carry back offset
There is essentially a 3-step process in calculating a loss carry back tax offset for the current year:
- To make a ‘loss carry back choice’ for the current year. This includes, for example, to choose to carry back tax loss from one loss year to one or two tax liability years; or to choose to carry back tax losses from two loss years to one tax liability year. The choice can be made when preparing the company’s tax return;
- To calculate the loss carry back tax offset components for each tax liability years; and
- To calculate the loss carry back tax offset for the current year, subject to tax liability and franking account balance limitations (which is discussed below).
Loss carry back choice
To carry back a loss, the company must make a ‘loss carry back choice’ for the current year. The choice must be made in the approved form which in most instance, will be the company’s tax return.
The loss carry back choice may vary depending on companies’ circumstances:
Loss carry back tax offsets components
The company’s loss carry back tax offset component for an income year can be calculated using the 3 steps below:
- Choose the tax loss in particular loss year(s) to be carried back to particular tax liability year(s);
- Reduce step 1 amount by the company’s net exempt income for the year (if any); and
- Multiply the step 2 amount by the corporate tax rate for the loss year (noting the corporate tax rate for the loss year may be different from the tax liability year).
The company’s loss carry back tax offset component for the income year cannot exceed the step 3 amount. Where tax losses are carried back to more than one tax liability year, the above steps should be undertaken for each relevant tax liability year.
Loss carry back tax offsets
The loss carry back tax offsets equals to the sum of the loss carry back tax offsets components however subject to the franking account balance of the company at the end of the year in which the company seeks to claim the loss carry back offsets.
Any limitations to the offset amount?
There are a few limitations to the amount of the carried back tax offsets:
- The amount of the carried back tax offsets to an income year is limited by the available income tax liability of that income year.
- The loss carry back tax offset for an income year is limited to the company’s franking account balance at the end of the year in which the company seeks to claim the carry back offsets. If the offsets exceed the franking account balance, the loss carry back tax offset amount is reduced to the franking account balance of that year.
- The loss carry back tax offset measure in general, is subject to a set of integrity rules.
A practical example
Tax losses from one loss year which is carried back to one tax liability year
Current year/ loss year 2020 – 2021
- Tax loss = $600,000
- Franking account balance: $150,000
- Tax Rate: 30%
Tax liability years / 2019 – 2020
- Income tax liability = $120,000
- Tax rate: 30%
Loss carry back tax offset components for the 2021 income year is:
- Offset component for the 2019 – 2020 income year: $600,000*30% = $180,000.
As the offset component amount of $180,000 is greater than the franking account balance of the loss year and also the tax liability of the tax liability year, therefore, the total loss carry back tax offset for the 2020-2021 income year is only $120,000.
Co-authored by Gloria Liang, Manager Tax Consultant, Melbourne