Start date – losses incurred in 2019/20.
Election first available when lodging 2020/21 tax return.
The Government has announced that the tax law will be amended to allow corporate tax entities with an aggregated turnover of less than $5 billion to elect to carry-back tax losses from the 2019–20, 2020–21, or 2021–22 income years to offset previously taxed profits in 2018–19 or later income years.
The effect of the election will be to generate a refundable tax offset and it will first be available when lodging the 2020–21 tax return, subject to the amount carried back not being more than the earlier taxed profits and not generating a franking account deficit.
Corporate tax entities with an aggregated turnover of less than $5 billion will be able to apply tax losses against taxed profits in a previous year, generating a refundable tax offset in the year in which the loss is made.
As with the former regime, the carry back is notional — it is not necessary to amend the prior year return — the benefit is received in the assessment for the year in which the election is made.
The tax refund will be limited by requiring that the amount carried back is not more than the earlier taxed profits and that it does not generate a franking account deficit.
However, unlike the previous regime, provided taxed profits in the earlier year are sufficient and the carry back would not generate a franking account deficit, there is no set monetary cap on the amount of loss that can be carried back or the amount of refundable tax offset that can be received.
Using the election
The tax refund will be available on election by eligible businesses when they lodge their 2020–21 and 2021–22 tax returns.
If the election is not utilised, or to the extent that there are not sufficient taxed prior year profits to allow full carry back of a loss, any losses not carried back are carried forward in the usual manner.
An additional proposed benefit of the loss carry-back measure will be its interaction with the new incentive for companies to invest under the temporary full expensing measure, by providing cash flow to enable them to utilise that measure.
Example — Loss carry-back in successive years
Jamie owns a coffee bean wholesaling company, Jamie’s Coffee Pty Ltd, which has an aggregated annual turnover of $51 million. In 2018–19, Jamie’s Coffee Pty Ltd made a tax profit of $5 million and paid $1.5 million in income tax.
Due to the impact of COVID-19 restrictions on customer demand and its ability to trade, Jamie’s Coffee Pty Ltd makes a tax loss of $2 million in 2019–20.
Under the current tax law treatment of losses, Jamie’s Coffee Pty Ltd would carry these losses forward until it made a taxable profit. With temporary loss carry-back, when the company lodges its 2020–21 company tax return, it will receive a tax refund of $600,000 in recognition of this loss and tax paid in 2018–19.
Continuing into 2020–21, reduced trading means Jamie’s Coffee Pty Ltd makes another tax loss of $500,000. The company paid enough tax in 2018–19 to also offset the loss from 2020–21, resulting in a further refund of $150,000. Source: Budget Document: Lower Taxes at page 11
Example — Interaction of loss carry-back and full expensing
Bogong Builders Pty Ltd has aggregated annual turnover of $60 million for the 2021–22 income year. On 1 July 2021, Bogong Builders Pty Ltd purchases a truck-mounted concrete pump for $1 million, exclusive of GST. The company’s taxable income for 2021–22 was $600,000 before the purchase. Without temporary full expensing, Bogong Builders Pty Ltd would claim a tax deduction of around $300,000, resulting in a taxable profit of $300,000, and a tax bill of $90,000.
Under temporary full expensing, Bogong Builders Pty Ltd will instead deduct the full cost of the asset of $1 million, resulting in a tax loss of $400,000. Under temporary loss carry-back, Bogong Builders Pty Ltd offsets this tax loss against profits in 2018–19, resulting in a tax refund of $120,000. Without the refund, the company may have had to defer the investment until its cash flow position recovered or it may not have purchased the new pump at all. Source: Budget Document: Lower Taxes at page 12
<< Author: Njameh Cham >>