The Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 introduced an optional temporary loss carry back for companies which received Royal Assent last year, 14 October 2020. The Act inserts new Div 160 into the ITAA 1997.

What does the Loss Carry-Back means?

The qualified corporate tax entities can elect to ‘carry back’ a tax loss incurred in the year 2019–2020 to 2021–2022 income years and offset it against the income of the 2018–19 or later years, generating a refundable tax offset in assessments for the year 2020–2021 and 2021–2022 income years.

Eligibility requirements for tax offset

THE COMPANY

A company must meet the eligibility requirements to choose to carry back the loss and claim
the tax offset. A company can claim the tax offset if :

  • are an eligible entity
  • made tax losses in the 2019–20, 2020–21 or 2021–22 income years
  • had an income tax liability for the 2018–19, 2019–20 or 2020–21 income years
  • have a surplus in your franking account at the end of the income year that you are
  • claiming the tax offset
  • have met your tax return lodgment obligations.

An entity must be a corporate tax entity all through the income year for which it elects to claim the carry back and throughout the term, it is seeking to carry back the loss.

Additionally, the company must meet one of the following:

  • it is a small business entity (SBE) for the income year as defined in Subdiv 328-C; or
  • it would be an SBE for the income year if the SBE annual aggregated turnover threshold was $5 billion instead of $10 million.

That is:

  • the company carries on a business in the income year;
  • one or both of the following applies:
    • the company carried on a business in the previous income year and its aggregated turnover for the previous year was less than $5 billion; and/or
    • the company’s aggregated turnover for the income year is likely to be less than $5 billion.
THE RELEVANT INCOME YEARS

You can only carry back certain tax losses to certain income years for which you have
an income tax liability.

The loss carry back can be claimed between 2020–2021 or 2021–2022 (known as the ‘current year’).

The loss must be incurred in the 2019–2020 or the 2020–2021 income years. In this current year 2021–2022 then the loss year will also be the 2021–2022 income year.

TAX LOSSES

This applies only to tax losses and not capital losses and it can only be used once.

Below are the other losses that can’t be carried back:

  • transferred losses between companies in the same foreign banking group.
  • transferred losses by a joining entity to the head company of a consolidated group.
  • losses that arose as an outcome of excess franking offsets.
  • capital losses
TAX LIABILITY REQUIREMENTS

An entity is required to complete its lodgment requirements or assessments have been created for the current year and each of the five income years before the current year (unless the company was not required to lodge an income tax return for the year).

The company must have had an income tax liability for any or all the following income years:

  • the 2018–2019 income year
  • the 2019–2020 income year
  • the 2020–2021 income year
TAX LODGEMENT OBLIGATIONS

To claim the tax offset for an income year, you must both:

  • lodge your tax return for that income year
  • have lodged for the previous five income years.

If you have not lodged for any of those income years, you may still be able to claim the
tax offset if for those years, either:

  • we assessed your income tax liability
  • you were not required to lodge a tax return.

Making a choice…

To carry back a loss, the entity must make a ‘loss carry back choice’ for the current year. The choice must be created in the ‘approved form’ which will usually be the entity’s tax return.

Amount of the loss carry back tax offset

The amount of the loss carry back tax offset that can be claimed for the income year is the lesser of the following:

  1. after the end fo their 2020–2021and 2021-2022 income years
  2. in their 2020–21 and 2021–22 company tax returns.
THE LOSS CARRY BACK TAX OFFSET COMPONENT

The entity’s ‘loss carry back tax offset component’ for an income year is greater for its income tax liability for the year that does not surpass:

  • if the business chooses to carry back only one tax loss to the income year — the amount worked out at Step 3 of the method statement below: or
  • if the business chooses to carry back tax losses for 2 or 3 loss years to the income year — the sum of the amounts worked out at Step 3 of the method statement below.

If the entity does not choose to carry back any tax losses to the income year, then its loss carry back tax offset component is zero.

STEPS ON THE METHOD STATEMENT

Step 1 — Begin with the amount of the tax loss the company has chosen to carry back to the income year.

Step 2 — Reduce the Step 1 amount by the company’s net exempt income for the year (but not to the extent the net exempt income has already been utilised).

Step 3 — Multiply the Step 2 amount by the corporate tax rate for the loss year.

Step 4 — The company’s loss carry back tax offset component for the income year is so much of its income tax liability for the income year as does not exceed the Step 3 amount.

LIMITATION TO THE OFFSET

Income tax liability

The value of the amount carried back to an income year is limited by the available income tax liability of that income year. Each part of a tax liability is one-time use only.

When working out the loss carry back tax offset component for 2021–2022, the business must disregard a lot of the tax liability for the gain year as it has previously been included in a loss carry back tax offset component for the year 2020–2021.

Franking account balance

The loss carry back tax offset for an income year is limited to the company’s franking account at the end of that year. This guarantees that the entity cannot apply the balance of credits in the franking account to frank distributions to shareholders and claim the refundable offset for the same year.

A franking credit is recorded in the account if you pay a PAYG instalment.

Paying your Quarter 4 PAYG instalment on or before the last day of the income year will not result in a credit to your franking account on that day. The credit will occur in the subsequent income year.

A franking debit is recorded in the account if you receive a refund of income tax. A debit will arise in your franking account if you get a tax refund because you claimed the tax offset. This will happen on the day you receive the refund.

These rules do not apply if you are a foreign resident for more than half of the income year you are carrying the loss back to. The exception is if you are a New

*When a business receives a tax refund as an effect of the offset, this will add to a debit in the company’s franking account.

Integrity rule

An integrity rule refused the loss carry back tax offset where there has been a change in control in the entity arising from a disposition of membership interests which was made with a purpose of gaining access to the tax offset.

The Explanatory Memorandum to the Act states that normally a change of control that arises from generational change or as an outcome of the breakdown of marital and personal relationships within family owned CTEs would not indicate that there was a purpose of obtaining a tax offset.

Businesses must self-assess whether the integrity rule applies to their circumstances.

*Losses that cannot be carried back because of the integrity rule can still be carried forward and claimed as a deduction against income of future years, provided that the company satisfies the continuity of ownership or business continuity tests.

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If you follow our information and it turns out to be incorrect, or it is misleading and you make a mistake, as a result, we will take that into account when determining what action, if any, we should take.

Some of the information on this website applies to a specific financial year. This is clearly marked. Make sure you have the information for the right year before making decisions based on that information.

If you feel that our information does not fully cover your circumstances, or you are unsure
how it applies to you, contact us or seek professional advice via at 1300 844 678 or send an email to [email protected].