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Tax Losses: How to Maximise Your Refund with Carry-Back Rules
If your business has incurred tax losses, there may be a chance to recover some of the tax previously paid on past profits. The Australian Government introduced new rules in the 2020-21 Federal Budget, allowing businesses with turnover under $5 billion to carry back losses from the 2019-20 to 2021-22 period against taxable profits from previous years, specifically 2018-19 and 2020-21. These tax loss carry-back rules offer an opportunity for businesses to generate a refundable tax offset, providing crucial cash flow relief, particularly after a challenging financial period.
How Does the Loss Carry-Back Work?
Previously, businesses could only carry tax losses forward, deducting them against income in future years. However, the new rules allow companies to carry back losses to offset profits from past years. This means that a tax loss incurred in 2019-20, 2020-21, or 2021-22 can be carried back and applied to taxable income from 2018-19 or 2019-20, resulting in a refundable tax offset. This change is particularly helpful for companies that made profits in the years prior to the loss period but are now struggling to return to profitability. While the carry-back is limited to the amount of tax paid in the profitable years, it provides an immediate opportunity to reclaim taxes that may have been overpaid.
Eligible Entities for Tax Loss Carry-Back
The loss carry-back rules are available to a range of corporate tax entities, including companies, corporate limited partnerships, and public trading trusts. To take advantage of these rules, the entity must have filed an income tax return for the current year and each of the five years immediately preceding it.
This is important because if the entity has missed any of its reporting obligations, it may not be eligible to use the carry-back provisions. It’s also important to note that businesses must opt to apply the loss carry-back when lodging their tax returns for the 2020-21 and 2021-22 income years. For example, a business that incurred a loss in 2019-20 can only claim that loss on the 2020-21 tax return.
Claiming the Refundable Tax Offset
To claim the refundable tax offset, businesses need to make an election when lodging their tax returns. This is the case for both the 2020-21 and 2021-22 tax years. For the 2020-21 income year, a business can claim a loss carry-back tax offset if they meet certain conditions, including having a tax loss in the 2019-20 or 2020-21 income years, and having a corresponding income tax liability in 2018-19 or 2019-20.
It’s essential for businesses to be up to date on their tax returns, as the carry-back is only available if the tax returns for the current and previous years have been lodged and assessed. Additionally, the carry-back cannot result in a franking account deficit, meaning the refund is restricted by the company’s franking account balance.
Strategic Use of Tax Losses
These new tax provisions are designed to support businesses investing in growth and recovery, offering significant benefits, especially when combined with other measures such as the immediate expensing of capital assets. By generating tax losses through new investments, companies can carry these losses back to recover taxes paid in profitable years, thus improving their overall financial position.
If your business is considering major investments or has incurred significant tax losses, it’s a good idea to review your position with a professional advisor. By understanding how carry-back provisions interact with other tax planning strategies, businesses can make informed decisions that maximise their financial outcomes. To get the best results from these new tax loss provisions, contact us for expert advice on optimising your tax strategy.
