One of the COVID-19 stimulus measures announced as part of the 2020 Budget is the temporary ‘Loss Carry Back’. This is a new refundable Tax Offset that allows companies to receive a tax refund for their 2020, 2021 or 2022 Tax Loss, rather than having to carry the loss forward to offset against future years.
If a company incurs a tax loss in 2021 FY, rather than carrying this loss forward as would normally be the case, it can now elect to ‘carry back’ the loss and offset it against tax paid in prior years. As a refundable offset, the refund can be a cash refund, reduced tax liability or tax debt. This is a great outcome for those companies who have paid tax in the past but have since suffered losses in 2020, 2021 or 2022.
The Loss Carry Back Tax Offset was designed to be used in conjunction with Temporary Full Expensing, which by allowing large asset write offs, may result in a tax loss. Rather than having to carry the loss forward, the eligible company can receive the cash benefit of this loss/refund immediately. See the example below as outlined in the Budget fact sheet:
Bogong Builders Pty Ltd has aggregated annual turnover of $60 million for the 2021–22 income year. On 1 July 2021, Bogong Builders Pty Ltd purchases a truck-mounted concrete pump for $1 million, exclusive of GST. The company’s taxable income for 2021–22 was $600,000 before the purchase. Without temporary full expensing, Bogong Builders Pty Ltd would claim a tax deduction of around $300,000, resulting in a taxable profit of $300,000, and a tax bill of $90,000.
Under temporary full expensing, Bogong Builders Pty Ltd will instead deduct the full cost of the asset of $1 million, resulting in a tax loss of $400,000. Under temporary loss carry-back, Bogong Builders Pty Ltd offsets this tax loss against profits in 2018–19, resulting in a tax refund of $120,000. Without the refund, the company may have had to defer the investment until their cash flow position recovered, or may not have purchased the new pump at all.
In order to be eligible to use the Loss Carry Back Tax Offset, the company needs to have a turnover of less than $5 billion in the loss year and be up to date with compliance lodgements.
Losses cannot be carried back earlier than the 2019 FY and the value of the amount carried back to an income year is limited to the amount of tax paid for that financial year, and the balance of the franking account at the end of the year the claim is made.
One consideration to be mindful of when electing to use the Loss Carry Back tax offset is the impact on the company’s franking account balance and ability to declare a fully franked dividend.
If your company has sustained losses and you would like to explore the advantages and disadvantages of carrying back or carrying forward these losses, please contact your Davidsons accountant for further information. Alternatively, please contact our office on 03 5221 6399 or email us at firstname.lastname@example.org for more information.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article