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:
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:
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.
Eligible Entities can claim the tax offset if:
Loss carry back rules applies only to tax losses and the below are not eligible for carry back
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.
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
The information contained on this website and in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Taxation, legal and other matters referred to on this website and in this article are of a general nature only and are based on our interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.