Loss carry-back tax offset for corporate entities explained

The ATO published an explanation of the refundable tax offset that eligible corporate entities can claim after the end of their 2021-22 income years in 2020-21 and 2021-22 tax returns. Where applicable, this refundable tax offset may result in a cash refund, reduced tax liability, or a reduction of debt owing to the ATO.

What is the loss carry-back tax offset?

Loss carryback provides a refundable tax offset that eligible corporate entities can claim:

• after the end of their 2020–21 and 2021–22 income years
• in their 2020–21 and 2021–22 company tax returns

Eligible entities get the offset by choosing to carry back losses to earlier years in which there were income tax liabilities. The offset effectively represents the tax that the eligible entity would save if it was able to deduct the loss in the earlier year using the loss year tax rate. As it is a refundable tax offset, it may result in a cash refund, a reduced tax liability, or a reduction of a debt owing to the ATO.

The eligible entity does not need to amend the earlier income years to claim the offset.

If an entity does not choose to carry back a loss, the loss may be carried forward to use in a later income year.

Loss carryback is intended to interact with temporary full expensing, encouraging new investment which may result in tax losses. Where the choice to carry back tax losses results in a tax refund, this will increase business cash flow.

At this time, the ATO is considering the application of the loss carry-back choice. This includes whether there is any ability to revoke, amend or make additional choices after making an initial loss carryback choice. You can talk to Geoff Morris at Billings + Ellis about any updated rulings and options available.

Eligibility for the tax offset

Before choosing to carry back the loss and claim the tax offset, you must first be certain that your entity will meet the eligibility requirements.

You can claim the tax offset if you:

• 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

Eligible entities

You are an eligible corporate entity if you are both a:

• company, corporate limited partnership or a public trading trust throughout
  • the income year that you are claiming the tax offset
  • the income year you choose to carry the loss back to (ignoring any part of the year before you existed)
  • any income years in between
• small business entity in the loss year or would have been a small business entity if the aggregated turnover threshold was $5 billion

The rules for calculating aggregated turnover are the same as those used for the small business entity concessions. Your aggregated turnover may include the annual turnover of other business entities, in addition to your own annual turnover.

Tax losses and tax liabilities

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

Tax losses

You can only carry back tax losses made in the 2019–20, 2020–21 or 2021–22 income years.

You can only use a tax loss once.

You cannot carry back:

• capital losses
• certain tax losses arising from the conversion of excess franking offsets
• transferred losses relating to either
  • foreign banking groups
  • head companies of consolidated groups

Tax liabilities

You can carry back losses to the 2018–19, 2019–20 or 2020–21 income year if you were liable to pay income tax for that year.

Check your eligibility

The following table shows which income year your tax loss must be made in and which income year you can carry that loss back to:

Tax liability in the income year	Tax loss made in 2018–19 or prior income years	Tax loss made in 2019–20 income year	Tax loss made in 2020–21 income year	Tax loss made in 2021–22 income year
2018–19	n/a	Can carry the 2019–20 loss back to the 2018–19 income year	Can carry the 2020–21 loss back to the 2018–19 income year	Can carry the 2021–22 loss back to the 2018–19 income year
2019–20	Not eligible	n/a	Can carry the 2020–21 loss back to the 2019–20 income year	Can carry the 2021–22 loss back to the 2019–20 income year
2020–21	Not eligible	Not eligible	n/a	Can carry the 2021–22 loss back to the 2020–21 income year

Franking account surplus

The amount of tax offset available is limited to your franking account surplus on the last day of the income year for which you claim it.

Lodgment 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:

• the ATO assessed your income tax liability
• you were not required to lodge a tax return

How to claim the tax offset

You cannot claim the tax offset in your Company tax return 2020 for a tax loss made in the 2019–20 income year. You will be able to claim the tax offset in your Company tax return 2021 or Company tax return 2022.

Claiming the tax offset is optional. To the extent you choose not to carry back the losses, you may be able to carry them forward to a future income year.

If you want to claim the tax offset for an income year, you will need to make the loss carry-back choice by the time you lodge your company tax return for that year.

When making the choice, you will also need to specify the amount of tax loss you choose to carry back.

Form to claim the tax offset

If you are lodging your Company tax return 2021:

• on or after 1 July 2021 – you can choose to carry back a loss and claim the tax offset in your company tax return for that income year. The Company tax return 2021 form will have the additional labels you will need to complete.
• before 1 July 2021 – refer to Loss carryback – 2020-21 early balancer substituted accounting period or lodging a company tax return for part-year.

Check which form to use to claim the tax offset or ask Geoff Morris at Billings + Ellis for advice:

Your 2020–21 income year ends	Before 30 June 2021	Before 30 June 2021	On or after 30 June 2021	On or after 30 June 2021
Are you required to lodge a company tax return for a part year?	Yes	No	Yes	No
If you are lodging your company tax return before 1 July 2021, use:	2020–21 early balancer substituted accounting period claim form	2020–21 early balancer substituted accounting period claim form	2020–21 early balancer substituted accounting period claim form	n/a
If you are lodging your company tax return on or after 1 July 2021, use:	Company tax return 2021 form	Company tax return 2021 form	Company tax return 2021 form	Company tax return 2021 form

Information needed to claim the tax offset

You will need to complete additional labels in the Company tax return 2021 to make the choice to carry back losses. The labels provide the ATO with information on your eligibility to claim the tax offset and the calculation of the amount. If you complete these labels, the ATO can process your claim in a timely manner.

To complete the additional labels, you will need to have the following information:

• your opening and closing franking account balance, which is necessary for the calculation of the amount of the tax offset
• your aggregated turnover for each loss year, which is necessary to ensure you meet the eligibility requirement and will also help inform future services and initiatives for business
• the amounts of your tax losses that you are carrying back, which informs the ATO of your choice and forms the basis of the calculation of the amount of the tax offset
• your tax liability for the income years you are carrying the loss back to, which is necessary for the calculation of the amount of the tax offset
• the amounts of unutilised net exempt income for the income years you are carrying the losses back to, which is necessary for the calculation of the amount of the tax offset

If you are submitting the Loss carry back – 2020-21 early balancer substituted accounting period or lodging a company tax return for part-year claim form, the ATO will ask you to provide this information.

You can start preparing for your claim by reviewing your franking account balance early and considering your aggregated turnover. By doing so, you will have the information needed to complete the additional labels.

Working out the tax offset

Loss carryback provides a refundable tax offset. Refundable tax offsets can reduce the amount of tax you are liable to pay to zero which may result in a refundable amount.

The amount of tax offset may be affected by your net exempt income, income tax liabilities, and the surplus in your franking account.

Exempt income

In working out the amount of your tax offset, you must reduce the amount of loss you are carrying back by any (unutilised) net exempt income you had for the income year you are carrying back the loss to.

Once the exempt income has been used to reduce a loss you are carrying back, you do not use it to reduce another loss carried back to that same income year.

Tax liability in the year carried back to

The amount of your tax offset cannot exceed your income tax liability for the income year you are carrying the loss back to.

Once the amount of your income tax liability for an income year has been fully used to claim tax offsets, you cannot claim any further offset amounts by carrying back losses to that year.

Franking account

The amount of your tax offset is also limited by the surplus in your franking account on the last day of the income year in which you are claiming the tax offset.

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 Zealand company that has chosen to enter the Australian imputation system.

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.

Losses can only be used once

To the extent that you have carried back a tax loss, you can only use it once. This means you cannot:

• carry the same tax loss back again
• carry it forward to use it in a future income year.

This includes any losses that have been used to reduce your exempt income.

How to calculate the amount of tax offset

To calculate the amount of your tax offset for an income year, follow these steps:

1. For each tax loss you are carrying back to an earlier income year
   1. determine the amount of the tax loss you are carrying back
   2. work out the net exempt income, that has not previously been used, in that earlier income year
   3. subtract the amount at step 1b from the amount at step 1a
   4. multiply the result from step 1c by your tax rate for the income year in which you made the loss

2. If more than one tax loss is being carried back to the same earlier income year, add the step 1d results together. The amount you can claim is capped at the amount of your income tax liability for that earlier income.
3. If you are carrying back losses to more than one earlier income year, apply steps 1 and 2 for all years the losses are being carried back to and add the results together.
4. If the amount calculated under step 3 is greater than your franking account surplus at the end of the income year in which you are claiming the tax offset, your offset is limited to your franking account surplus. Otherwise, the amount of your tax offset is the amount calculated under step. Note that step 4 does not apply to foreign residents (other than New Zealand franking companies).

Integrity rules

A specific integrity rule can deny the loss carryback in cases where there is:

• a scheme for disposition of ownership interests resulting in a change of control of a corporate entity
• a financial benefit received in connection with the scheme
• a more than incidental purpose of enabling the entity to get a loss carry-back tax offset

Existing general anti-avoidance rules have also been adapted so that they may apply appropriately in the context of loss carryback.

The ATO will be providing further information on the operation of integrity rules for loss carry-back, and on features of arrangements or schemes that may attract ATO attention in due course.

Paying your liabilities

The ATO will not defer the due date for payments you owe solely because you expect a potential future refund from claiming the loss carry-back tax offset. If you have the capacity to pay, the ATO will expect payment on time and in full.

If you can’t pay on time, the ATO can work with you to find a solution tailored to your situation. Talk to Geoff Morris at Billings + Ellis for specific advice and assistance.