Click here to learn more about Loss carry back tax offset tool from the ATO guide
Note: Loss carry back tax offset cannot be more than Closing franking account balance. User can read how to complete franking account records here - https://www.ato.gov.au/business/imputation/paying-dividends-and-other-distributions/franking-account/"
This article provides the following guide:
- Loss carry-back offset rules
- General Eligibility requirements:
- Franking account deficit
- Business test and COVID-19 pandemic
Loss carry-back offset rules
A corporate tax entity is able to utilise the loss carry-back tax offset for the 2019/20, 2020/21, and/or 2021/22 income year. However, an entity who incurred a tax loss in 2019/20 income year is only eligible for the refundable offset on lodgement of the 2020/21 income tax return.
Any tax loss made in above income years is only eligible for the carry-back offset if the entity had an eligible income tax liability. An income tax liability consists of the entity's gross tax payable on taxable income at the applicable rate less any tax offsets applied. For an income tax liability to be eligible for the loss carry-back offset must have accrued as a result of the 2018/19, 2019/20, or 2020/21 income years.
When claiming the loss carry-back offset, the corporate tax entity must use the corporate tax rate in the loss year. ie, the base rate entity has a corporate tax rate of 26% in the 2020/21 income year.
A corporate tax entity is not able to claim a refundable offset for a capital loss, as these are dealt separately in the Tax Acts.
The loss carry-back tax offset also cannot exceed the:
- amount of the earlier tax paid by the entity (during the relevant years), and
- balance of the entity's franking account at the end of the income year in which the offset is being claimed
General Eligibility requirements:
- Apart from having tax losses in a relevant income year, a corporate tax entity is eligible for loss carry-back offset if turnover is under $5B. In this instance, turnover refers to the definition used in small business entity regime, Therefore, turnover refers to aggregated annual turnover, including all the corporate tax entity's connections and associates.
- A corporate tax entity musta also been able to utilise the loss under loss integrity rules. These rules are commonly known as the "Continuity of ownership test or the Similar business test"
- The entity must have lodged an income tax return for the current year and each five years immediately preceding it to be entitled to the offset. In some instances, a corporate tax entity may not have been required to lodge a return for a necessary income year. This does not preclude an entity's eligibility for the offset. ie, If a company has returns lodged for the previous three years due to not being in existence prior to that, it will be allowed to claim an offset.
Client Profile: Companies with a tax loss in the 2019/20 and later income years (ending 2021/22).
This checklist is designed to provide a tax practitioner's client with a quick and simple answer to whether you/they are entitled to a refund as announce from the 2020 federal budget. The checklist does not go into details regarding when the refund is payable, nor how much of a prior tax payment is eligible for refunding.
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- 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.
Franking account deficit
In applying the loss carry-back tax offset, the refund is limited to the year-end balance of the franking account, in the offset claim year. The refund will be applied after year-end and is a debit to the franking account. A possibility exists where a company claims the offset and will be in a franking account deficit at the following year-end, forcing a levy of Franking Deficit Tax.
Companies should be careful to claim the offset when one or both of the following situations apply to them:
- They pay dividends each year, including to repay a complying Division 7A loan.
- They are claiming for a multiple year at the one time, where PAYG installment are also due to be refunded.
Business test and COVID-19 pandemic
Some businesses had to pivot to continue operating during the OVID-19 pandemic. Therefore, situations may arise which bring into question the similar business test where the company cannot satisfy the continuity of ownership test.
Prior to making a judgement on whether the similar test is passed, practitioners should ask their client about the extent to which the:
a. same activities were being continued, or
b. same business assets were being used.