An optional, temporary loss carry back for companies has been introduced by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020, which received Royal Assent on 14 October 2020. The Act inserts new Div 160 into the ITAA 1997. This article outlines the key elements of the new loss carry back.
What is the loss carry-back?
Eligible corporate tax entities can elect to ‘carry back’ a tax loss incurred in the 2019–20 to 2021–22 income years and offset it against the income of the 2018–19 or later years, generating a refundable tax offset in assessments for the 2020–21 and 2021–22 income years.
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.
Definition — corporate tax entity
‘Corporate tax entity’ is defined in s. 960-115 of the ITAA 1997 to be an entity that is a company, a corporate limited partnership or a public trading trust. In this article, the term ‘company’ is used to refer to all corporate tax entities.
Further, the company must satisfy one of the following:
- it is a small business entity (SBE) for the income year as defined in Subdiv 328-C; or
- it would be an SBE for the income year if the SBE annual aggregated turnover threshold was $5 billion instead of $10 million.
- the company carries on a business in the income year;
- one or both of the following applies:
- the company carried on a business in the previous income year and its aggregated turnover for the previous year was less than $5 billion; and/or
- the company’s aggregated turnover for the income year is likely to be less than $5 billion.
The relevant income years
The loss carry back can be claimed in 2020–21 or 2021–22 (known as the ‘current year’).
The loss must be incurred in the 2019–20 or the 2020–21 income years. If the current year is 2021–22 then the loss year can also be the 2021–22 income year.
The loss carry back applies only to tax losses and not capital losses.
Other losses that cannot be carried back are:
- losses which have been transferred between companies in the same foreign banking group;
- losses which have been transferred by a joining entity to the head company of a consolidated group;
- losses which arose as a result of excess franking offsets.
Tax lodgment and liability requirements
It is a requirement that the company has satisfied its lodgment 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).
The company must have had an income tax liability for any or all of the following income years:
- the 2018–19 income year;
- the 2019–20 income year;
- if the current year is the 2021–22 income year and it is a loss year — the 2020–21 income year.
Making a choice
To carry back a loss, the company must make a ‘loss carry back choice’ for the current year. The choice must be made in the ‘approved form’ which will usually be the company’s tax return.
Amount of the loss carry back tax offset
The amount of the loss carry back tax offset that can be claimed for the income year is the lesser of the following:
- The sum of the ‘loss carry back tax offset components’ for:
- the 2018–19 income year;
- the 2019–20 income year;
- if the current year is the 2021–22 income year — the 2020–21 income year.
- The company’s franking account balance at the end of the current year.
The loss carry back tax offset component
The company’s ‘loss carry back tax offset component’ for an income year is so much of its income tax liability for the year that does not exceed:
- if the company chooses to carry back only one tax loss to the income year — the amount worked out at Step 3 of the method statement below; or
- if the company chooses to carry back tax losses for two or three loss years to the income year — the sum of the amounts worked out at Step 3 of the method statement below.
If the company does not choose to carry back any tax losses to the income year, then its loss carry back tax offset component is nil.
The method statement
Step 1 — Start with the amount of the tax loss the company has chosen to carry back to the income year.
Step 2 — Reduce the Step 1 amount by the company’s net exempt income for the year (but not to the extent the net exempt income has already been utilised).
Step 3 — Multiply the Step 2 amount by the corporate tax rate for the loss year.
Step 4 — The company’s loss carry back tax offset component for the income year is so much of its income tax liability for the income year as does not exceed the Step 3 amount.
Limitation to the offset
Income tax liability
The value of the amount carried back to an income year is limited by the available income tax liability of that income year. Each part of a tax liability can be used only once.
When working out the loss carry back tax offset component for 2021–22, the company must disregard so much of the tax liability for the gain year as has previously been included in a loss carry back tax offset component for 2020–21.
Franking account balance
The loss carry back tax offset for an income year is limited to the company’s franking account at the end of that year. This ensures that the company cannot apply the balance of credits in the franking account to frank distributions to shareholders and also claim the refundable offset for the same year.
When a company receives a tax refund as a result of the offset, this will give rise to a debit in the company’s franking account.
An integrity rule denies the loss carry back tax offset where there has been a change in control in the company arising from a disposition of membership interests which was done with a purpose of gaining access to the tax offset.
The Explanatory Memorandum to the Act states that ordinarily a change of control that arises from generational change or as a result of the breakdown of marital and personal relationships within family owned CTEs would not indicate that there was a purpose of obtaining a tax offset.
Companies must self-assess whether the integrity rule applies to their circumstances.
Losses that cannot be carried back as a result of the integrity rule can still be carried forward and claimed as a deduction against income of future years, provided that the company satisfies the continuity of ownership or business continuity tests.
Supported by comprehensive training materials, our November Tax Update training session will ensure you are fully informed of:
- how to claim the refundable tax offset;
- the implications for the franking account;
- practical examples for calculating the offset;
- how to make the choice to carry back a loss;
- carrying back a loss to multiple income years; and
- the integrity rule.
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