Many small businesses are facing tough times ahead as Government Coronavirus stimulus measures wind down. With vaccinations underway, executives everywhere are thinking about the critical next months of the pandemic. Has your business incurred loss due to COVID 19 pandemic?

Loss carried back rules were introduced by the Government in the 2020-21 Federal Budget and subsequently legislated in October 2020. We have summarised the key eligibility requirements and methodology to calculate the loss carry back tax offset below: 

Eligible Entities

An entity must be a corporate tax entity in the income year for which it seeks to claim the loss carry back and satisfy the below requirements:

• the company carries on a business in the income year.
• one or both of the following applies:
  • the company was a small business entity in the previous income year and its aggregated turnover for the previous year was less than $5 billion; and/or
  • the company’s aggregated turnover for the income year is likely to be less than $5 billion.

Eligible entities have to satisfy lodgement obligations to claim the tax offset for an income year and must have lodged income tax return for the previous five income years.

Loss Period

Eligible Entities can claim the tax offset if:

• The entity has incurred loss in the financial years 2019-20, 2020-21 or 2021-22-income years.
• Loss carry back can be claimed in 2020-21 or 2021-22 financial years (known as the ‘current year’).
• Entity was liable to pay income tax in the 2018–19, 2019–20 or 2020–21 income years.
• There is a surplus in the franking account at the end of the income year that it is claiming the tax offset.

Eligible Losses

Loss carry back rules applies only to tax losses and the below are not eligible for carry back

• capital losses
• tax losses that were transferred to or from companies in the same foreign banking group
• losses transferred to a head company of a tax consolidated group by a joining entity, and
• losses generated as a result of excess franking offsets

Estimating the Tax Offset

Step 1 – Eligible entities with tax losses during FY 2020 to FY 2022 can chose to carry back the tax loss to earlier income year, this amount is excluded by the amount of exempt income if any from earlier income year.

Step 2 – Multiply the Step 1 amount by the corporate tax rate for the loss year.

If there are losses carried back to more than one earlier income years, repeat Step 1 and Step 2 for all years the losses are being carried back and add the results.

Step 3 – Amount at Step 2 is limited to the entity’s income tax liability for that earlier income year.

Step 4 – Eligible tax offset is capped to the maximum available franking account balance at the end of the income year in which you are claiming the tax offset.

When there is a tax refund as a result of loss carry back tax offset, it results in a debit to the franking account.

How to Claim

Company must claim through the current year income tax return and will be eligible to claim the tax offset in the 2020-21- or 2021-22-income years.

Eligible entities can choose to either carry forward or carry-back part or all of the tax loss and there are no strict rules that requires to use losses in the order in which they arose for the loss carry-back tax offset unlike the loss carry forward rules.

Depending on the impact on franking account and the company’s future dividend strategy, an entity might choose to apply loss carry-back offset as it results in refund and relieves stress on the cash flow.

If you have any queries regarding this eligibility and the opportunities it may provide to assist your business, please do not hesitate to contact our office.

Written for you by Aarthy Kumar