Loss carry back

Loss ‘carry back’ measure for companies

In the lead up to the Budget, the Government announced a loss ‘carry back’ measure for companies to commence from the start of the 2012-13 income year. Under this measure, companies will be able to ‘carry back’ losses to offset prior year profits, and obtain a refund of tax previously paid on those prior year profits. This measure is intended to assist corporate businesses facing pressures from the patchwork economy and encourage growth and investment.

While the specific details of the measure announced by the Government are still to come and will be the subject of a Discussion Paper yet to be released, it appears that the Government has largely accepted the model put forward by the Business Tax Working Group. Key features of this model will include:
  • an initial one year carry back period from the 2012-13 income year (i.e. 2012-13 tax losses can be carried back and offset against tax paid in 2011-12)
  • a two year loss carry back period to apply from the 2013-14 income year
  • a $1 million cap on the amount of losses able to be carried back, and
  • refunds will be limited to the balance of a company's franking account.
The Government has also announced that the loss carry back will be subject to integrity rules, however no details of these rules have been provided.

This measure is seen by the Government as a major tax reform to assist small businesses, although the benefits of the measure will be available to all companies, regardless of size.

Specifically, the $1 million cap on the amount of losses able to be carried back translates to a real cash benefit of up to $300,000 per year for eligible companies (based on a corporate tax rate of 30 per cent) and is realised at a time when they are most vulnerable to cashflow concerns.

A loss carry back regime will bring the Australian tax system in line with a number of international tax systems including the United States, the United Kingdom, Canada, France and Germany.

The Business Tax Working Group (BTWG) recommended that the loss carry back should be implemented through a refundable tax offset rather than by amending tax assessments of prior income years. It is not clear from the Government's announcement whether this aspect of the recommendation will be adopted.

Some further practical observations include:
  • Only companies (and entities taxed like companies) can benefit from the proposal. Therefore, businesses operated by sole traders (individuals) or through trusts will miss out on the benefit of this measure.
  • The loss carry back applies to revenue losses only – no relief is given for capital losses.
  • The measure is aimed primarily at assisting companies that experience a temporary setback which results in a period of losses following a period of profits. It is of limited benefit to start up companies and businesses that typically experience a sustained period of losses before generating a profit (for example, large scale infrastructure projects - although note that separate loss incentives were proposed for certain eligible designated infrastructure projects in last year's Federal Budget).
  • The limit on carry back refunds to the balance of a company's franking account means that companies will need to consider this as part of planning for the payment of franked dividends. Paying out franked dividends to shareholders may limit the ability of a company to carry back losses in future income years.
  • For those companies which are looking to carry forward losses to later income years, we are yet to see if there will be any future reforms to the application of the same business test (as raised by the BTWG) which is often onerous and difficult for many companies to pass.
The following is a worked example of the potential application of the loss carry back measures, assuming a corporate tax rate of 30 per cent.
Year 2012-13 2013-14 2014-15
Assessable income $3,000,000 $3,000,000 $1,500,000
Allowable deductions ($1,500,000) ($1,500,000) ($1,800,000)
Taxable income $1,500,000 $1,500,000 ($300,000)
Tax payable $450,000 $450,000  
Loss carried back     $300,000
Carry back refund     $90,000
Total carry forward losses      
In this example, the total tax paid over the carry back period is $900,000. Therefore, the company should be entitled to a carry back of the full value of the tax loss in the 2014-15 year ($300,000 x 30 per cent), subject to any limits that may be imposed based on the company's franking account balance.