THE TECHNICAL CORNER: Carry Your Losses Back To Generate a Bigger Tax Cash Refund

As part of the stimulus measures the Government is using to support businesses and improve cash flow, the Loss Carry Back Tax offset is one way to generate some cash through a tax refund. Basically, you could only carry losses forward in the past, but now we can carry them back to offset prior-year tax liabilities which will ultimately generate a tax refund (cash) for your business. This mainly benefits companies who made profits in the past but due to Covid-19 and the economic crisis are currently making losses.

What is Loss Carry Back Tax Offset?

Generally, tax losses are only carried forward and cannot be applied against the prior year’s profits to reduce an income tax liability.

The Loss Carry Back Tax Offset allows eligible entities to have an option to carry back losses made in 2020, 2021, and 2022 financial years to offset against tax paid in prior income years as far back as 2018-19 (but not before 2018-19). This means that you can only carry back income tax losses to certain income years from which you have made profits.

Eligible entities must wait until they can lodge their 2021 or 2022 company tax returns to claim back the tax paid in prior years.

 

Example of how the Loss Carry Back Tax Offset works:

In the 2018-19 income year, XYZ Co had a profit of $100,000.00 and paid an income tax liability of $27,500.00 (tax rate of 27.5%)

For the 2019-20 financial year, the company made a loss of $100,000.00 and carries the loss back to 2018-19 when the company made a profit. The company can reduce its 2019 profit to nil by carrying back the $100,000.00 loss made in 2020.

In the 2020-21 financial year, the company made a tax loss of $50,000. The company cannot carry back the loss of $50,000.00 against 2019 profit because the income for that year has already been reduced to nil from the 2020 loss carryback.

For the 2020-21 company tax return, XYZ Co will be eligible for a tax refund of $27,500.00 as a benefit of using the Loss Carry Back scheme for its 2020 losses on the 2019 profits.

 

Who is eligible for the Loss Carry Back Tax Offset?

You are an eligible entity if you are both a:

  • The company, Corporate Limited Partnership or Public Trading Trust
  • The small business entity – aggregated turnover threshold was no more than $5 billion.

*Note: Loss Carry Back Tax Offset does not apply to Sole Traders, Partnerships and Trust.

You can claim the tax offset if you:

  • are an eligible entity
  • made tax losses in the 2019-20, 2020-21 or 2021-22 financial years
  • had an income tax liability for the 2018-19, 2019-20 or 2020-21 financial years
  • have sufficient franking credits remaining on your franking account
  • have met your tax return obligations

What are the Benefits?

  • You can claim tax losses on prior income year rather than wait for future periods where you will earn income to offset your losses.
  • Increase cash flow by claiming back the tax you paid in a prior years tax return which should result in a tax refund.

If you would like to know more about the Loss Carry Back Tax Offset then get in contact with us today here,

Kelly Horsfield