Carry Back Losses

Posted on 23rd February 2013 by Christabelle Harris

Late last year the Federal Government released legislation to implement a carry back of losses mechanism which is to apply from 1 July 2012 going forward. This important piece of legislation has had little commentary since being announced but may be an important tax planning tool for many businesses.

Assume a company makes a loss of $100 in year one and a profit of $100 in year two. The company pays no income tax in year two because it is able to carry forward the $100 of losses from year one and apply them against the current year profits.

Compare the above to the reverse situation, with the same company earning a profit in year one and an offsetting loss in year two. Under the previous legislation the company pays tax on the year one profit, despite making a zero result across the two years combined. Under the new legislation the company will still pay tax on the profit in year one, but will subsequently be able to carry back the year two loss to obtain a refund of that tax once the loss is crystallised in year two.

As always certain criteria need to be satisfied in order to access the carry back rules. In brief these are:

  • The loss carry back applies to companies only.
  • Losses may be carried back for one year for the 30 June 2013 year and two years after that time.
  • The loss carry back will take the form of a refundable tax offset. The mechanism to claim the offset will be the lodgement of the income tax return for the loss year.
  • In order to claim the offset the company must have incurred a tax liability in the carry back years. For example, for a company to claim a refundable tax offset from a loss incurred in the 2014 year of income, the company must have incurred an income tax liability in at least one of the 2012 or 2013 years.
  • Only revenue losses may be carried back (not capital losses).
  • The maximum amount of losses carried back in any year will be $1 million, meaning that the maximum refundable tax offset at the 30% company tax rate would be $300,000.
  • Losses to be carried back must first be offset against net exempt income in the carry back year (in the same way as losses carried forward are first offset against exempt income in that future period).
  • The application of the loss carry back provisions will be optional. For example, companies faced with the situation described above in terms of the losses wasting against net exempt income in an earlier year may well not apply the loss carry back provisions. A taxpayer may also apply to carry back only part of the eligible losses.
  • The refundable tax offset will be limited to the balance of a company’s franking account. Assume that a company earns a profit and pays tax in an earlier year. That company distributes the benefit of the company tax paid in the form of a franked dividend, reducing the franking account balance to nil. The company can’t then utilise the loss carry back in a subsequent year as the franking account has a nil balance.
  • The continuity of ownership test (COT) and same business test (SBT) are to apply over the carry back period in a similar way to which that currently apply to losses being carried forward.

The current economic climate has seen pressures on margins and profit in some industry sectors resulting in tax losses in the current year. The carry back provisions could provide some much needed cashflow assistance to those businesses eligible to access the provisions.
When meeting with us to discuss your year end tax planning in the April/May period, GeersSullivan will be sure to utilise the above for those that meet the eligibility criteria.

If you have any questions in relation to carry back losses please contact one of our qualified Accountants on (08) 9316 7000.

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