Loss carry back and the permanent instant asset write-off are now law: what businesses need to know

The 2026–27 Federal Budget included a number of high-profile tax measures. However, some of the less prominent measures may also have practical implications for businesses, particularly those companies experiencing a temporary downturn or for small business who invest in business assets. 
 
Two measures that businesses should have on their radar are the reintroduction of loss carry back for companies and the permanent $20,000 instant asset write-off for small business. Both measures are law and broadly apply from 1 July 2026 and may have implications for cash flow, dividend and investment decisions. 

Loss carry back is back 

The Government has reintroduced a two-year loss carry back regime for eligible companies. 

For income years commencing on or after 1 July 2026, corporate tax entities (companies, corporate limited partnerships and public trading trusts) that are not significant global entities (SGEs) for the loss year (broadly, entities that are not part of a group with annual global income of $1b or more) may carry back a tax loss and offset it against tax paid in either or both of the previous two income years. The resulting benefit is provided as a refundable tax offset. The measure only applies to revenue losses and not capital losses. 

The loss carry back tax offset is calculated using the company’s corporate tax rate for the loss year, which may be lower or higher than the rate at which tax was originally paid. The choice to carry back a loss is made in the tax return for the loss year, and the company must generally have lodged its returns for that year and the previous five years.

The measure is similar to the temporary loss carry back regime introduced during COVID-19, which allowed losses made in the 2019–20 to 2022–23 income years to be carried back against tax paid in the 2018–19 and later income years. Those rules were temporary, whereas the new rules are permanent with no end date. The new rules operate on a rolling basis, allowing a loss to be carried back to either or both of the two preceding years and claimed in the tax return for the loss year itself. The eligibility test also move from the former $5b aggregated turnover threshold to the SGE concept, which companies already report in their tax returns. Because the SGE test looks at global group income of $1b or more, fewer companies are likely to qualify, including Australian subsidiaries of large foreign groups regardless of their local size.

An important practical limit of the offset is that the refundable loss carry back tax offset cannot exceed the company’s franking account balance at the end of the loss year. This prevents a company from obtaining a refund of tax already passed on to shareholders as franking credits. As such, a company that has distributed most of its profits as franked dividends may receive little or no benefit and franked dividends paid during a loss year may reduce the refund. A franking debit for the refund arises when the refund is received after the end of the loss year. Accordingly, paying a franked dividend in the year after the loss year may put the franking account into deficit and trigger franking deficit tax if the account remains at deficit at the end of that year. 

A company can choose how much of its tax loss for the year to carry back and must specify the amount carried back to either or both of the two preceding years. The choice must be made in the approved form, which will ordinarily be the company tax return for the loss year, by the time that return is lodged. The Commissioner may allow a choice to be made later, for example where an earlier year assessment is amended after lodgment and this makes carry back available or changes the maximum offset.

A company can also change its choice by notifying the Commissioner in the approved form within the period allowed for amending its assessment for the loss year (generally two or four years, depending on the company’s circumstances). This flexibility may be useful where, for example, the tax liability for an earlier year is later revised. 

The usual ownership and business continuity tests for losses do not apply to loss carry back. Instead, a specific integrity rule may deny the loss carry back offset where there is a scheme for the sale of shares in the loss company (or in an interposed entity) that results in a change in control of the company and a more than incidental purpose of the arrangement is to obtain a benefit from the offset. In deciding this, relevant factors include whether the company continues the same business and keeps using assets that are not readily replaceable. Transactions involving generational change of the ownership of a family company or transfers following a relationship breakdown are not, by themselves, expected to be caught by the integrity rule. Importantly, taxpayers must self-assess whether the integrity rule applies to their circumstances.

For businesses that have previously paid income tax but subsequently experience a period of lower profitability, the reintroduction of loss carry back may provide an opportunity to bring forward the benefit of any tax losses rather than waiting to utilise them against future taxable income.

Any loss that is not carried back remains available to be carried forward and deducted in future years under the usual rules.

For most companies, the first opportunity to claim the offset will be a 2026-27 tax loss, carried back to either or both of the 2024-25 and 2025-26 income years and claimed in the 2026-27 tax return. With the 2026-27 income year already under way, companies that may make a loss this year should consider loss carry back in their current-year tax planning.

It is also worth mentioning that the 2026-27 Federal Budget announced that with effect from 1 July 2028, small start-up companies (i.e. those with aggregated annual turnover of less than $10m) that generate a tax loss in their first two years of operation will be able to convert that loss into a refundable tax offset limited to the value of fringe benefits tax (FBT) and withholding tax on wages paid to Australian employees in the loss year. These rules are yet to be developed.

The $20,000 instant asset write-off is now permanent 

The Government has permanently extended the $20,000 instant asset write-off for eligible small businesses from 1 July 2026.

Small businesses with aggregated annual turnover of less than $10m that choose to use the simplified depreciation rules can immediately deduct eligible depreciating assets costing less than $20,000. The threshold applies on a per-asset basis, meaning multiple eligible assets can qualify for immediate deduction.

Depreciating assets costing $20,000 or more continue to be dealt with under the small business simplified depreciation rules. The general small business pool value threshold is also permanently increased to $20,000, which means that a pool balance below $20,000 at year end can be fully written off. The suspension of the five-year “lock-out” rule is also extended to 30 June 2027, allowing businesses that previously opted out of simplified depreciation to opt back in.

Making the measure permanent gives businesses greater certainty when considering investment in eligible assets, rather than relying on annual extensions of the threshold.

The interaction with loss carry back may also be relevant. For an eligible company, significant investment and the resulting immediate deductions may contribute to a tax loss. Where that occurs, the loss carry back rules may provide an opportunity to obtain a refund of tax paid in an earlier year, subject to meeting the applicable requirements as discussed earlier.