BUSINESS TAX FACTSHEET
Australia's business community has weathered a significant amount of uncertainty since the global financial crisis and as the resources boom tapers off the real impact on business is becoming clearer.
Many SMEs have incurred losses over the past financial year however new legislation means that many will be able to take advantage of new loss carry-back rules.
Loss carry-back rules provide businesses with the choice to carry-back all or part of a tax loss from an income year - or the preceding year - against unutilised income tax payable in either of the previous two income years. Generally speaking, a tax loss refers to the amount by which deductions exceed assessable income for the tax year. Under the new rules, businesses can carry back losses to previous years as an alternative to carrying them forward.
The loss carry-back is optional and business owners can choose which tax loss to carry back and how much to carry back. It is important however to ensure that your documentation for expenditure is good shape and that you work out the best approach for your business.
From 2013/14 and later income years, the loss carry-back refund can be claimed against tax liabilities of either of the two income years preceding the current income year.
The new legislation also includes a transitional measure for the 2012/13 income year only, when a loss carry-back refund can be claimed against the 2011/12 income year.
Loss carry-back will not be available to trusts, partnerships or sole traders, and some losses such as capital losses and excess franking offsets, are not eligible to be carried back.
Some of the key features of the loss carry-back provisions are:
It is only available to corporate tax entities (i.e. companies or entities taxed like companies);
- It is limited to revenue losses;
A two-year time limit applies (with a transitional one year carry-back period for the 2012/13 year); and
The amount of losses that can be carried back will be limited to the lesser of:
- previously paid taxes in the loss carry-back period;
- an amount of loss the entity chooses;
- the entity's franking account balance; and
- a quantitative cap of $1 million.
Where the loss carry-back rules are satisfied, a corporate tax entity is entitled to a refundable tax offset for the losses it chooses to carry-back. This approach is less complex and more cost effective than amending prior year tax returns.
One of the points to note is that the loss carry-back amounts must firstly be reduced by the unutilised net exempt income in the year it is carried back to.
While there is no requirement that an eligible loss must be carried back to the earliest year first, or that the earliest loss must be carried back first, the deduction of prior year carried forward tax losses must be applied first before working out the loss carry-back offset.
Any losses that remain after working out the loss carry-back offset can be carried forward as a deduction in future income years.
Tax losses can be carried back against previous years or deducted against future income.
Loss carry-back can be used to increase cash flow, bringing forward the cash flow benefit of the losses rather than having to wait until the company makes taxable profits in future years.
Alternatively a business may wish to carry forward a tax loss for future use and deduct in the year of their choosing, however losses must be utilised in the order in which they occurred. Special rules apply to net exempt income and franked dividend income.
The choice must be made by the time that the entity lodges its tax return for the current income year, or within such further time as the ATO allows.
Even though the loss carry-back rules represent a positive step for small business taxpayers should be conscious of the increased emphasis on documentation to substantiate losses.
It is likely that there will be increased ATO compliance focus around these rules due to the ability to claim a 'cash benefit' in the year of the loss rather than simply creating a deduction against future taxable income.
Your accountant will be best placed to review your documentation and ensure is up to standard to keep onside with the Tax Office.
If your business has sustained losses and you're unsure about the benefit of carrying back or forward, contact Bates Cosgrave on 02 9957 4033 for a review of your current and future tax position.
A case study: How the loss carry-back tax offset is calculated
So what does this all mean in practice? Let's look at an example:
ABC Pty Ltd has been operating for a number of years and paid tax of $75,000 in the 2012 income year (i.e., taxable income of $250,000). The company had no carried forward tax losses at the end of the 2012 year. In the 2013 year the company makes a tax loss of $200,000 due to significant investment in new plant and equipment and weaker trading conditions. The company has a franking account balance of $400,000.
The company's refund under the loss carry back rules is limited to the lesser of the following amounts:
- The tax value of the current year loss (i.e., 30% x $200,000 = $60,000)
- The tax value of the statutory cap (i.e., 30% x $1m =$300,000)
- The franking account balance (i.e., $400,000); and
- The tax paid in the carry back period (i.e., $75,000).
In this case the company can carry back its full tax loss for the 2013 year against the tax paid in the prior year and will receive a cash refund of $60,000. This brings forward the cash flow benefit of the losses rather than having to wait until the company makes taxable profits in future years.
The example above illustrates how loss carry-back can be calculated, however it is always advisable to speak to your accountant about how to best utilise loss carry-back for your business.
Download PDF Version: Utilising Loss Carry-back
Last updated August 2013. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.