How business tax works
How the business loss carry-back refund works
Note: The company loss carry-back is associated with the Minerals Resource Rent Tax (MRRT) which is currently slated for repeal. If the MRRT is repealed, the company loss carry-back will be abolished. Read the Tax Office's guidance on the matter.
Companies will be able to carry back up to $1 million worth of losses to get a refund of tax paid on an immediately previous year's profit — in effect, claiming back tax already paid on past profit (therefore a refund at the company tax rate of 30% means a full claim will yield $300,000).
However it must be emphasised that claims cannot be made until after the end of the 2012-13 income year, even though the reform is 'effective' from July 1, 2012 (which actually means that relevant losses can start to be recorded from that date). So any company making a loss in the 2011-12 income year will miss out, as the new measure only applies to losses made from July 1, 2012 onwards (that is, the claim back will become an option for 2012-13 financial year tax calculations).
For the 2013-14 income year and thereafter, companies will be able to claim losses against tax paid for up to two previous years. The measure will apply to revenue losses only, will be subject to integrity rules and will be limited to a company's franking account balance.
Crucially however, the loss carry-back is not available to sole traders, partnerships or trusts. It is restricted to incorporated small businesses, which has drawn strong criticism, especially as around three-quarters of all small businesses are not companies. The government says up to 110,000 small businesses will be eligible to make the claim in its first four years.
Former Head of Tax & Superannuation at Taxpayers Australia, Roger Timms, says the attraction of the loss carry-back system in difficult economic times is obvious. 'A business which has incurred losses will commonly require additional funding to maintain operations, which most often would be sourced from bankers and financiers,' he says.
'However, a business asset in the form of
tax losses is unrealised. A refund of tax by application of those losses under the carry-back system would provide vital funding when it is most needed, thereby assisting the entity to maintain economic viability and hence employment of its workforce.'
Business groups have long been urging the adoption of a loss carry-back option for businesses, saying that although the present regime permits carry forward of tax losses -which can be done indefinitely as long as certain conditions are met.
However, the ability to use those losses is dependent on the ability of the company to derive assessable income in the future.
The ability to carry back losses is also seen as an automatic stabiliser during an economic downturn and could provide welcome cash flow relief to businesses. There is also the view that gains and losses are treated differently, with gains taxed as they accrue, but losses only permitted to be carried forward and used against future income, subject to certain conditions (such as continuity of ownership and same business test).
A further negative aspect of the current carry-forward system, Timms says, is that it effectively devalues the 'tax loss' asset by the mere effluxion of time. 'The loss carry-back proposal is not new,' he says. 'The Henry Review of the tax system included it as Recommendation 31: Companies should be allowed to carry back a revenue loss to offset it against the prior year's taxable income, with the amount of any refund limited to a company's franking account balance.'
The fact that the measure is restricted to incorporated small businesses however is viewed by Timms as a drawback, especially given the predominance of other business structures in the small and medium enterprise (SME) sector. 'Loss carry-back regimes are typically perceived as being applicable to companies,' he says, 'however for the proposal to have the maximum benefit for the SME sector it would be necessary to extend the operation beyond companies.'
For a full breakdown of the measures contained in the 2012-13 Budget, click here.
Last reviewed 11/07/2014