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.
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:
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:
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:
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.
The amount of the loss carry back tax offset that can be claimed for the income year is the lesser of the following:
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 does not choose to carry back any tax losses to the income year, then its loss carry back tax offset component is nil.
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.
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.
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.
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