The devil is in the detail when applying the loss carry back measures

For the year ended 30 June 2021, a company with an aggregated turnover of less than $5 billion can choose to carry back 2021 and/or 2020 tax losses and offset them against prior year tax liabilities.

Specifically, tax losses made in 2020 can be carried back and offset against a company’s 2019 income tax liability and tax losses made in 2021 can be carried back and offset against a company’s 2019 and 2020 income tax liability.

The amount of offset/refund will be limited to the lesser of:

• The amount of tax paid previously; and
• The surplus in the franking account at the end of the 2021 income tax year.

When applying these loss carry back rules it is also important to note that:

• The tax rate in the year the company made the loss is used to calculate the tax offset. With the reduction of the corporate tax rate, a base rate entity (a company with aggregated turnover of less than $50 million that derives 80% or less of its income from dividends, interest, royalties, rent and net capital gains) carrying back tax losses made in 2020 will use a 27.5% rate whereas tax losses made in 2021 will use a 26% rate to calculate the offset.
• Because the amount of the offset/refund will be limited to the lesser of the amount of tax paid previously and the surplus in the franking account at the end of the 2021 income tax year, it is important to use the correct income tax liability amount and to calculate the correct franking account balance.

The loss carry back measures can be complicated and the devil is in the detail. If you incurred a loss in the 2020 and/or 2021 income tax years and paid tax in relevant earlier years, please speak to your Crowe adviser. Alternatively, get in touch with the Tax Advisory team who can review your franking account and your tax liability to help ensure the loss carry back measures are correctly applied.