Temporary loss carry back measure

Background

The Federal Government in its 2020-21 Federal Budget announced the temporary loss carry back measure that will be available to eligible corporate tax entities to assist them with cash flow by generating a tax refund.

The Treasury Laws Amendment (A Tax Plan for the Covid-19 Economic Recovery) Bill 2020 was passed into law on 14 October 2020.

What is the temporary loss carry back measure?

This measure will enable corporate tax entities the opportunity to generate a tax refund by utilising its tax losses in either the 2020, 2021 or 2022 income years by applying them against income paid in earlier income years (being 2019, 2020 or 2021).

For example, where a company has paid tax in the 2020 income year and is now making a tax loss in the 2021 income year, under this measure, the company will be able to choose to offset the tax loss in the 2021 income year with the tax paid in the 2020 income year. The benefit for the company under this measure is that it will be able to receive a cash refund for tax paid in the earlier year (2020) whilst it is in a tax loss position (2021).

It should be noted that this measure only applies to tax losses, as such corporate tax entities will not be eligible to carry back losses generated from the following:

  • Capital losses arising from a CGT event;
  • Losses that have arose from a result of excess franking credits; or
  • Tax losses transferred to the head entity of an income tax consolidated group.

Eligibility

This measure is only available to corporate tax entities that carry on a business and have an aggregated turnover of up to $5 billion in the income year that it has incurred the tax loss. Importantly, the aggregated turnover includes the turnover of the corporate tax entity itself and its related entities (both in Australia and worldwide).

Some corporate tax entities that will not be eligible to access this measure, include the following:

  • Start-up corporate tax entities.
  • Corporate tax entities who don’t have taxable income in any of the income years between 2019 to 2021.
  • Life insurance companies.
  • Foreign hybrid limited partnerships.
  • Venture capital limited partnerships.
  • Early stage venture capital limited partnerships.

How to access this measure?

Corporate tax entities that are eligible for this measure will receive a tax refund when they lodge their 2021 and 2022 income tax returns.

The amount of the tax refund (the tax refundable offset) will be calculated based on the corporate tax entity’s tax rate in the tax loss income year and limited to the following:

  • The amount of income tax paid in the earlier income year; and
  • The entity’s franking account balance at the end of the income year for which the refundable tax offset is claimed.
*corporate tax entities includes a company, a corporate limited partnership or a public trading trust.