Loss carry-back provisions announced in the Budget now enacted

Within days of the 2020-2021 Federal Budget, the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 was passed by the Federal Parliament. 

This Act contains most of the tax measures announced in the Federal Budget, including the loss carry-back provisions, which are now contained in Division 160 of the Income Tax Assessment Act 1997.

At their core, the loss carry-back provisions allow tax losses incurred in the years ended 30 June 2020, 2021 and/or 2022 to be carried-back and applied against taxable income from the years ended 30 June 2019, 30 June 2020 and/or 30 June 2021 (as the case may be) by way of a refundable tax offset.

While the provisions do apply in respect of 30 June 2020 losses (where the relevant company did have taxable income in the year ended 30 June 2019), the refundable tax offset can only be claimed in the 30 June 2021 or 30 June 2022 income tax returns.  There is no mechanism to claim it in the 30 June 2020 income tax return, which may have already been lodged.  Even if not yet lodged, the “approved form” to claim this offset will only be available with the 30 June 2021 and 30 June 2022 income tax returns.

The provisions are best demonstrated by way of example:

• In the year ended 30 June 2019, Company X had taxable income of $5,000,000 and paid income tax of $1,375,000 at 27.5%;
• In the year ended 30 June 2020, Company X was severely impacted by COVID-19 and made a tax loss of $2,000,000;
• In the year ended 30 June 2021, Company X was still impacted by COVID-19 but only made a tax loss of $500,000.

When Company X lodges its 30 June 2021 income tax return, it may carry-back its 30 June 2020 tax loss of $2,000,000 and its 30 June 2021 tax loss of $500,000 against the tax liability it paid in the year ended 30 June 2019.  The refundable tax offset of $680,000 is calculated as follows:

• year ended 30 June 2020 - $2,000,000 x 27.5% = $550,000; and
• year ended 30 June 2021 - $500,000 x 26% = $130,000.

Importantly, the refundable tax offset is limited to the balance of the company’s franking account at the end of the year of claim.  For example, if Company X’s franking account at 30 June 2021 was only $600,000, the refundable tax offset would be $600,000 rather than $680,000. 

This measure has been introduced to limit the possibility that the refunds will give rise to franking deficits tax, as the refund will generate a debit to the franking account.  However, it is not impossible for a deficit to arise in certain circumstances.
Other important matters to note in relation to the loss carry-back provisions include:

• The provisions are only available to companies that carry-on a business;
• The company’s aggregated turnover is less than $5 billion in the year of claim;
• The company’s income tax returns for the year of claim and each of the 5 prior years must be lodged (except where the company is not required to lodge an income tax return);
• Only tax losses are eligible for carry-back and not capital losses;
• Tax losses generated as a result of the full expensing of capital assets (which is covered in a separate article) can still be carried-back; and

It is up to the company to decide whether it wishes to use the loss carry-back provisions and, if so, how much of its losses to carry-back.  It is not compulsory to carry-back losses.  The loss carry-back provisions are subject to an integrity provision that is different to the normal Continuity of Ownership (“COT”) or Same/Similar Business Test (“SBT”) that is ordinarily applicable to carrying-forward losses.  Instead, the integrity provision in respect of the loss carry-back provisions may apply if:

• there is a scheme for the disposition of membership interests in the company during the period between the start of the gain year and the end of the claim year;
• the disposition results in a change of who controls or is able to control the company;
• an entity receives a financial benefit calculated by reference to the refundable tax offsets; and
• having regard to the relevant circumstances, it would be objectively concluded that the scheme was carried-out for a purpose (whether or not the dominant purpose, but not merely an incidental purpose) of obtaining the financial benefit.

The relevant circumstances to be considered, in addition to the traditional general anti-avoidance circumstances, are the extent to which the company continued to conduct the same activities after the scheme as before it, as well as whether it continued to use the same assets.  Therefore, it is for most intents and purposes an SBT where there has been a significant ownership change.  Companies that have not experienced a change in control would not be subject to this integrity provisions.

If your previously profitable and tax-paying company has generated tax losses in the year ended 30 June 2020 and/or might generate a tax loss in the current year, please contact your Prosperity adviser to discuss whether these loss carry-back provisions may be of assistance.  We will work closely with you to submit your 30 June 2021 income tax return and maximise your claim.