Many businesses have taken a hit to the bottom line during the COVID-19 pandemic. Fortunately, for those businesses who trade through companies, relief is available by taking advantage of the government’s new loss carry back scheme, writes Mark Chapman, director of Tax Communications at H&R Block.
The loss carry back scheme enables companies which have been hit by a loss in eligible years to carry that loss back against tax paid in earlier years, to generate a refund.
Eligible companies can elect to ‘carry back’ a tax loss incurred in the 2019–20 to 2022–23 income years, and offset it against the income of the 2018–19, 2019–20, 2020–21 or 2021–22 years, generating a refund of tax paid in the earlier year in the form of refundable tax offset.
As noted, the loss carry back scheme is only available to companies. Small businesses who trade through other entities such as sole traders, partnerships and trusts, are not eligible. They can only carry forward losses to use in later years.
How to claim the loss carry back tax offset
For a company to be eligible, it must carry on a business in the income year, and the company’s aggregated turnover for the previous year (or an estimate of turnover for the current year) must be less than $5 billion. In effect, the turnover threshold is so high that only the largest businesses will be excluded.
The following types of losses don’t count:
- capital losses;
- tax losses arising from the conversion of excess franking offsets from dividends received (unlike individuals, companies that receive a dividend are not entitled to a refund of excess franking credits; instead, these excess credits are converted into losses by dividing the amount of the excess credit by the company’s tax rate. Losses arising in this way cannot be carried back) and;
- losses transferred to head companies on consolidation.
The company’s franking account must be in surplus on the last day of the income year for which it claims the tax offset. The surplus must be at least as much as the refund claimed.
There is a lodgement condition, namely that to claim the tax offset, the company must have filed its income tax return for that income year as well as the previous five income years.
The offset is not automatic. To claim it, the company must make an election to do so in the appropriate box on the company income tax return. The election must specify (in dollar terms) how much of a tax loss for a particular income year is to be carried back to a particular earlier income year.
The amount of the tax offset cannot exceed a company’s income tax liability for the income year it is carrying the loss back to.
To the extent that a tax loss has been carried back, it can only be used once. This means that you cannot carry the same tax loss back again, or carry it forward to use it in a future income year.
Calculating your company’s tax offset
To work out the amount of tax offset, first work out the total amount of the tax loss the company would like to carry back to a particular year. Then, multiply that figure by the tax rate for the income year that the company incurred the carried-back loss. Add all of the tax loss amounts that the company intends to carry back to that earlier income year, and note that the amount of the offset is capped at the amount of the company’s income tax liability for that earlier income year.
Note also that if the amount of the offset is greater than the company’s franking account surplus at the end of the income year in which the tax offset is being claimed, the amount of the tax offset will be limited to the credit balance in the company’s franking account balance at the end of that income year.
Example:
Bingo Pty Ltd is a business that has been hit by the pandemic and has made a tax loss of $100,000 in the 2020–21 income year. Bingo has an income tax rate of 30 per cent.
At the end of its 2020–21 income year, it has a franking account balance of $25,000 and chooses to carry back all its tax loss from the 2021-21 income year to the 2018–19 income year, when it had an income tax liability of $40,000.
Bingo Pty Ltd calculates the amount of its tax offset for the 2020–21 income year as follows:
- Loss available to carry back is $100,000. Multiply this amount by 30%, being the tax rate for the 2020-21 income year = $30,000.
- The tax liability for the 2018-19 year is $40,000 (which is greater than $30,000) and hence no adjustment needs to be made at this stage to the amount carried back.
- However, as $30,000 is greater than Bingo Pty Ltd’s franking account balance at the end of the 2020–21 income year ($25,000), the amount of its tax offset is adjusted to the lower of the two figures, being $25,000.
Bingo Pty Ltd calculates the amount of its refundable tax offset from loss carry back as $25,000.
Anti-avoidance rules
The specific integrity rule for loss carry back denies a company a loss carry back tax offset it would otherwise be entitled to, where there has been a change in the control of the company arising from a disposal of shares and, considering all of the relevant circumstances, one or more parties entered into a scheme for the purpose of obtaining the tax offset.
Ordinarily, a change of control that arises from one generation retiring and handing over control of the company to the next generation, or as a result of a marriage breakdown within family-owned companies, would not trigger the anti-avoidance rules.
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