New company loss carry-back rules

Back in 2008 Ken Henry, in his review of Australia’s tax system, recommended the introduction of a loss carry-back regime. Nothing was done about this suggestion for quite some time but then, on the 6th of May 2012, then Treasurer Wayne Swan announced the government’s intention to introduce such a regime. The proposed legislation has since passed through parliament and received royal assent. It is therefore now law and applies from the 1st of July 2013.

So what are the key points you need to know?

  1. It is for company (well technically Corporate Tax Entities) losses only – sorry trusts (and no, having a corporate trustee does not count) and other entities.
  2.  It is for revenue losses only – bad luck if you’ve got capital losses.
  3.  It works via a refundable tax offset.
  4. This offset is capped at $300,000 (the tax on $1m) and also can’t exceed the company’s franking account balance at the end of the income year.
  5. You can carry back losses for two years but there are transitional rules so in 2012-13 you can only carry back one year.
  6. You have to choose to carry back the loss but there isn’t a special form to do this, you make the choice by how you lodge the company’s tax return.

Here are a two examples of how it will work;

Example 1

This one comes from example 6.3 in the Explanatory Memorandum.

In 2014-15 the company has $2m in taxable income and pays $600,000 in tax.

In 2015-16 the company makes a $700k taxable loss but chooses not to carry back that loss. To be honest I don’t fully understand why it would chose not to get the offset, if any readers know please leave an answer in the comments.

In 2016-17 the company makes a $2m taxable loss. It chooses to apply the $700k loss from 2015-16 plus $300k of the loss from 2016-17 (remember $1m is the maximum) against the taxable income from 2014-15. It gets back $300k of the $600k tax paid for 2014-15. The remaining $1.7m gets carried forward to use against assessable income in the future.

Example 2

This one comes from example 6.11 in the Explanatory Memorandum

In 2014-15 the company has $5m in taxable income and pays $1.5m in tax.

In 2015-16 it makes a $1.5m taxable loss. It carries back $1m of this loss and gets a $300k refundable tax offset.

In 2016-17 it makes a $2m loss and applies the remaining $500k from 2015-16 plus $500k from the current year loss against the 2014-15 profit, again getting a $300k refundable tax offset.

If it made a loss again in 2017-18 it could not carry that loss back to 2014-15 because there is a two year limit.

Overall I think these new rules are pretty good – better than a slap in the face with a wet fish – and will help quite a lot of businesses.  If you’ve got any questions or comments please let me know.