Announced in the 2020 Federal Budget, the legislation was officially released on 14 October 2020 and can be found under the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020.
The aim of the loss carry-back legislation is to provide temporary cashflow support to Australian companies that were in a tax-paying position prior to the COVID-19 pandemic, but who now find themselves in a tax-loss position as a result of the pandemic and/or through obtaining accelerated deductions for depreciation under the new instant asset write-off measures.
The corporate tax entities eligible for the temporary loss carry-back can elect to ‘carry back’ a tax loss incurred between the 2019–2020 and 2021–2022 income years and offset it against the income earned between the 2018–2019 income period, thereby generating a refundable tax offset in assessments for the 2020–2021 and 2021–2022 income years.
Who is Eligible to Claim the Temporary Loss Carry Back?
The temporary loss carry-back rules apply to companies, corporate limited partnerships and public trading trusts with an aggregated turnover of less than $5billion. An entity must be a corporate tax entity throughout the income year for which it elects to claim the carry back and throughout the period it is seeking to carry back the loss.
The offset is available to apply as a refund against the prior year tax paid, and the company will then be entitled to a refund of income tax paid from the 2018–19 income year onwards. However, the tax offset will only be available for the refundable offset upon lodging of the 2020–21 income tax return. The loss carry-back offset is in no way mandatory, but instead, completely optional. Should an entity choose not to apply for the refundable offset, the current rules that relate to loss deferral will apply.
What are the Temporary Loss Carry-Back Rules?
A corporate tax entity must also be 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 and are outlined as follows:
- Any tax loss made in the above income years is only eligible for the carry-back offset if the entity had an eligible income tax liability. When claiming the loss carry-back offset, the corporate tax entity must use the corporate tax rate in the loss year. For example, a base rate entity has a corporate tax rate of 26% in the 2020/21 income year.
- The company must have satisfied its lodgement requirements or assessments have been made for the current year and each of the five income years before the current year (unless the entity was not required to lodge an income tax return for the year).
- A corporate tax entity is not able to claim a refundable offset for a capital loss, as these are dealt with 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)
- balance of the entity’s franking account at the end of the income year in which the offset is being claimed.
Some Australian businesses had to pivot to continue operating during the COVID-19 pandemic. Therefore, situations may arise which bring into question the Similar Business Test, where the company can't satisfy the Continuity of Ownership test. This depends on the extent to which the same activities were being continued or the same business assets were being used.
Our BlueRock Accounting advisors would be happy to talk through how your business may benefit from the Temporary Loss Carry-Back Provisions and what you need to consider in order to remain compliant. Please get in touch with our Melbourne accounting team for a free consultation.