New legislation to enable corporate entities to utilise losses across prior year tax liabilities have received royal assent on the 14 October 2020 and has taken effect.
Eligible corporate entities include companies, corporate limited partnerships and public trading trusts. In order to utilise the carry back offset you have to pass the small business entities rules which include having a turnover of under $5 billion, having all ATO lodgements up to date, as well as ensuring the losses pass either the continuity of ownership or similar business test.
The new legislation will enable corporate entities to utilise losses incurred between the 2020 and 2023 financial years against prior years income tax liabilities that were incurred between the 2019 and 2021 financial years.
The application of this new legislation is optional, meaning entities do not have to carry back losses. If you choose not to carry back the loss you can offset it against future tax liabilities (subject to losses rules). However, it’s worth noting that due to decreasing tax rates of companies’ losses may be better applied using the carry back tax offset rather than carried forward as it will result in a higher refund.
Once the loss has been utilised against prior period tax liabilities it can no longer be utilised against future liabilities – i.e. you can only use losses once!
Entities should be wary of their franking account balance at the time of applying the losses to prevent any franking deficit tax occurring when utilising the losses, capping it at the franking account balance as at 30 June 2021.
The losses applied is for be income tax losses only and does not apply to any capital losses.
Example
| FINANCIAL YEAR | TAXABLE PROFIT/(LOSS) | TAX RATE | PAID | EQUIVALENT |
|---|---|---|---|---|
| 2019 | 100,000 | 27.5% | 27,500 | |
| 2020 | (60,000) | 27.5% | n/a | 16,500 |
| 2021 | (80,000) | 26.0% | n/a | 20,800 |
| Total losses eligible for carry backoffset | (140,000) | 37,300 |
Maximum offset available is $27,500 which is the tax liability in the 2019 financial year.
Assuming they have a franking account balance 40,000, the entity would be able to claim the full loss amount to 27,500 because it’s less than the franking account balance.
If the franking account balance was less than 27,500 it would be capped at the balance of the franking account.
