The Covid-19 pandemic has hit businesses hard and has resulted in many businesses making losses in either 2019/20 or 2020/21 (or both). As part of the Federal government’s Covid-19 stimulus package, the government introduced a loss carry back tax offset for corporate tax entities.
Corporate Tax Entities
The tax offset is limited to corporate tax entities that
- Have an aggregated turnovers of less than $5 billion;
- Incur a tax loss in the 2019/20, 2020/21 or 2021/22 income years;
- Have a profit in a relevant previous year from 2018/19 and later; and
- Have their income tax return lodgements up to date. In particular, a company has lodged a tax return for the current year and the previous five years.
| Loss Year | Tax Liability Year to which losses can be carried back |
| 2019/20 | 2018/2019 |
| 2020/21 | 2018/2019 and/or 2019/20 |
| 2021/22 | 2018/2019 and/or 2019/20 and/or 2020/21 |
For the year ended 30 June 2021, the loss carry back tax offset means that corporate tax entities may be able to receive tax refunds for tax paid in 2019 or 2020 if there is a loss in more recent years (2020, 2021). Please note only revenue losses can be carried back.
An Example
John Doe Pty Ltd makes widgets and has a turnover of $10 million. The taxable profit or loss for the last three years is
- 2018/19 Profit $300,000 – tax paid $82,500
- 2019/20 Loss $800,000.
- 2020/21 Profit $400,000
On this basis John Doe Pty Ltd could potentially receive a tax offset (which is refundable) of $82,500 for the year ended 30 June 2021, while still having a small amount of losses to carry forward to future years.
Offset Limits
The tax offset refund can not exceed the income tax liability of the year they are carrying back the loss to (in the above example, 2018/19). In addition, the tax offset can not exceed the franking account balance at the end of the claim year (in the above example, 2020/21).
Key Takeaway
The loss carry back provisions are optional and a corporate tax entity must carefully consider its position before determining whether to apply the provisions. The utilisation of the loss carry back provisions has the ability to increase cash flow by generating a tax refund but it also impacts the ability to pay dividends as the refund decreases the franking account balance.
If you would like to discuss any of the above, please contact your local Accru advisor.
