**Loss carry back rules can only be used in the 2021-onward form.


Note: It is necessary to visit the Reconciliation TAB and manually insert the losses you want to apply against current year profits.

Is your business eligible to use the loss carry-back tax offset?, click this guide to learn more.

Client Profile: Companies with a tax loss in the 2019/20 and later income years (ending 2021/22).

Example:

XYZ Pty Ltd located has a turnover that allows it to report as a Base Rate Entity. 

XYZ Pty Ltd was impacted by COVID through 2019/20 and 2020/21 income years.

The following table identifies income, losses and taxes for XYZPty Ltd over three income years to 30 June 2021.

Income YearTaxable Income/(Loss)Income Tax Expense
2018/19$3M$825,000
2019/20($1.5M)$-
2020/21($250,000)$-

As at 30 June 2021, the company's franking account balance is $485,000. All lodgements are up to date.

Calculate the loss carry-back tax offset available to XYZ Pty Ltd  in the 2020/21 income year.

Determine whether XYZ Pty Ltd   has any tax losses to carry forward to 2021/22 and later income years.


Solution

XYZPty Ltd   is a company and has lodged all the relevant prior year tax returns. Therefore, it is eligible to utilise the loss carry-back tax offset for the 2020/21 income year. 

XYZ Pty Ltd was unable to make a claim for the loss incurred during 2019/20 income year until lodgement of the 2020/21 tax return.

The calculation of the loss carry-back tax offset is a four-step process.


Step 1: Work out the amount of the loss to be carried carried back

Only losses from the 2019/20, 2020/21 and 2021/22 income years are eligible for the loss carry-back tax offset.

As XYZ Pty Ltd incurred a taxable loss during both 2019/20 and 2020/21 income years, they are both eligible. 

$1,500,000 + $250,000 = $1,750,000

The total tax loss eligible for carry-back is $1,750,000.


Step 2: Reduce the step 1 amount by net exempt income

XYZ Pty Ltd has no net exempt income for any of the years in question.

The amount eligible for carry-back remains as $1,750,000.


Step 3: Convert the step 2 amount to a tax equivalent amount

The conversion to use is the tax rate in the necessary loss year.

As XYZ Pty Ltd is a base rate entity (BRE), the company had a tax rate of 27.5% in 2019/20 and 26% in 2020/21.

The conversion is as follows:

Income yearTax rate (BRE)CalculationAmount
2019/2027.5%$1,500,000 x 27.5%$412,500
2020/2126%$250,000 x 26%$65,000

**click here for declining tax rate table.

Adding the amounts from 2019/20 and 2020/21, the total possible loss carry-back tax offset is $477,500.


Step 4: Work out the amount of the loss carry-back tax offset for an income year

XYZ Pty Ltd loss carry-back tax offset is the lesser of:

1. The sum of the loss carry-back tax offset amounts calculated at Step 3, and

2. The company's franking account balance at the end of 2020/21 income year.

A comparison of those two figures is as follows:

  • Eligible loss carry-back tax offset: $477,500
  • Closing franking account balance: $485,000

XYZ Pty Ltd is only able to claim back $477,500, i.e. it's Eligible loss carry-back tax offset. It will choose to claim the offset against tax paid in the 2019/20 income year.

On lodgement of its 2020/21 income tax return, XYZ Pty Ltd will be eligible for a tax refund of $477,500 being the loss carry-back tax offset.


Tax Losses to carry forward

The refundable loss carry-back tax offset of $477,500  used up ($477,500/27.5%) $1,736,364 of tax losses incurred by XYZ Pty Ltd.


The new measure allows the loss carry-back back offset to be claimed by a corporate  tax entity, defines a corporate tax entity as: Company , Corporate limited partnership, or Public trading trust.


Related Article:

Checklist - Loss carry-back offset (eligibility and requirements)

Declining tax rate