Loss carry back – the tax offset you need to know about
Loss carry back. Three simple words. But they don’t make sense together, do they?
You are excused from not knowing what loss carry back means.
It is another accounting term that may be important to your business.
We are going to explain what loss carry back tax offset is… and we promise, you won’t need an accounting degree to understand.
- What is loss carry back tax offset?
- Are you eligible for the loss carry back tax offset?
- When can you claim your loss carry back tax offset?
- Can you use other measures to create or increase a tax loss?
- What losses are eligible for the carry-back tax offset?
- What losses are ineligible for the carry-back tax offset?
- Is carry back loss compulsory?
- When can you claim a loss carry back?
- How is loss carry back calculated?
- Are there other considerations you should be aware of?
- Should your business claim carry back tax or carry forward?
What is loss carry back tax offset?
A loss carry back tax offset allows eligible corporate entities to carry back tax losses in their 2021 through 2023 tax returns to offset profits and tax paid as far back as the 2019 tax year.
For example, your business made a profit of $250,000 in the 2019-20 tax year on which it paid income tax.
It’s now the 2021-22 tax year and your business has made a loss of $120,000. You can offset this year’s loss with the profit you made on the previous 2019-20 tax year, to receive a refund.
That’s great, isn’t it?
The next step is to find out if your business is eligible for this offset.
Are you eligible for the loss carry back tax offset?
You must be a corporate tax entity with an aggregated turnover of less than $5 billion in the relevant loss year (using the aggregated turnover test referenced to small business entity concession rules).
Your business will need to have fulfilled its company tax return lodgement obligation for the five years prior to 2021-22 or since you were in business for less than five years.
If you’ve ticked these, read on.
When can you claim your loss carry back tax offset?
As an eligible entity, you can choose to carry back losses to earlier years in which there were income tax liabilities.
You can claim your loss carry back:
- after the end of 2020-21, 201-22 and 2022-23.
- and in the 2020-21, 2021-22 and 2022-23 company tax returns.
The best part is you do not need to amend the earlier income years to claim the offset. It is claimed through your current income tax return (too easy!).
Can you use other measures to create or increase a tax loss?
While no business wants a tax loss – and you work really hard to prevent a loss, sometimes in downturns, like the pandemic, they are unavoidable.
However, if your business has had a good year, there are other incentives and measures created by the government that you could implement to create a business loss, to use to carry forward the loss.
Too good to be true? Well, it’s not.
Let’s see how Joe from Sleek Plumbers Pty Ltd uses temporary full expensing to create a loss so he can use the loss carry back tax offset –
Not sure what temporary full expensing is? Find out here
Sleek Plumbers Pty Ltd has an aggregated annual turnover of $500,000 for the 2021–22 income year. On 1 September 2021, Sleek Plumbers Pty Ltd purchases a new one-tonne ute for $83,000, exclusive of GST.
The company’s taxable income for 2021–22 was $50,000 before the purchase. Without temporary full expensing, Sleek Plumbers Pty Ltd would claim a tax deduction of around $20,000 for the vehicle, resulting in a taxable profit of $30,000, and a tax bill of $10,000.
Using temporary full expensing, Sleek Plumbers Pty Ltd will instead deduct the full cost of the asset of $83,000, resulting in a tax loss of $33,000 ($50,000 income less $83,000 for the full cost of the ute).
Under temporary loss carry-back, Sleek Plumbers Pty Ltd offsets this tax loss against profits in 2018–19, resulting in a tax refund of $30,000.
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 ute at all, stalling business growth.
What losses are eligible for the carry-back tax offset?
Only tax losses are eligible for the loss carry back tax offset.
Tax losses are losses that are incurred from revenue losses.
Other types of losses are ineligible, which leads us to the next question…
What losses are ineligible for the carry-back tax offset?
The types of losses not eligible for carry-back include:
- capital losses – a loss made when you sell an asset for less than the adjusted basis.
- losses generated as a result of excess franking offsets (where you use franking credits to reduce your tax)
- losses transferred to a head company of a tax consolidated group by a joining entity, and
- tax losses that were transferred to or from companies in the same foreign banking group
Is carry back loss compulsory?
No, loss carry back loss is optional. You can choose to carry the loss forward or deduct prior year tax losses.
When can you claim a loss carry back?
Losses can only be claimed once on the day on which the company lodges its tax return for the year in which the offset is claimed.
How is loss carry back calculated?
The ATO has a great tool to help you calculate the amount of carry back loss you will receive.
Get the ATO loss carry back tax offset calculator
For each previous tax year, you will need to enter:
- the amount of tax payable in the relevant years’ company tax return,
- how much of this tax liability amount you have carried a tax loss back to in a previous company tax return,
- the amount of your net exempt income in the year, and
- how much of this net exempt income amount was used when you carried a loss back to this liability year in a previous company tax return.
After entering these figures, it will give you a dollar amount of maximum loss carry back tax offset, if applicable.
Sleek Scoop: If you have the above figures handy before you start, it will only take a few minutes to find out your loss carry back tax offset amount.
If this is too hard, no problem, ask a Sleek accountant to help you [link to contact us page?]
Are there other considerations you should be aware of?
Yes, here are two to think about:
- Your business can claim either the carry forward or carry back part or all of a tax loss.
- No ordering rules apply to using losses for the loss carry back tax offset.
Should your business claim carry back tax or carry forward?
This is a big question with many considerations.
It’s a great one to ask your accountant as there are so many variables and implications!
But here are a few points to think about:
- Claiming a loss carry back scores an immediate refund.
- A loss carry back could impact the franking account and the ability to pay franked dividends in the future.
- Claiming a carry forward loss runs the risk of the losses being lost due to fluctuations in the business carried on by the company or a change in ownership.
If you’re up for more details with good examples of different scenarios, visit the ATO webpage ‘Utilising franking tax offsets and effect on losses – corporate tax entities’.
Keen to see if your company is eligible to claim the loss carry back tax offset or how much your business will get back? Call our tax accountants on +61 2 9100 0480 or shoot through an email here – we’ll get back to you soon!