So I’m going to caveat today’s article by saying, I normally shy away from making articles too technical, let’s face it, they’re boring.  Today though I’m sailing a little into the wind with it.  The provisions I will cover may be extremely useful to some and possibly make the difference between continuing their business and insolvency.  Understanding how they work therefore is extremely important.

Managing cashflow in a business as we all know, is the key to success.  It can be incredibly difficult to manage, especially in times of economic upheaval i.e. recessions, or perhaps most topically, pandemics.

During the 2020/21 budget handed down by the Australian Government in October 2020 a series of measures were announced with the aim of helping businesses to manage their cashflow in order to continue to invest in the economy and keep it going.  One of those measures was a loss carry-back provision.

The 2020 financial year saw in many cases, heavily inflated profits where the effects of JobKeeper flowed through entities’ profit and loss statements.  2021 will not have the same kind of buffer and as such, entities may start to see losses creeping into their accounts.  Specifically here, we’re talking tax revenue losses (i.e. the ones on your tax returns), capital gains tax losses are not included in these provisions.  For the most part, up until October, the only thing entities were able to do with losses, was carry them forwards to offset against future profits (there have over the years, been several dabbles in carrying back losses, but such provisions are generally short-lived).  As a result of the October budget, eligible entities are now able to use a 2021 and/or a 2022 loss to offset taxes paid in the 2019, 2020 and/or 2021 financial years.

Are we talking a straight application of the say, the 2021 loss against 2020?  Unfortunately no.  As with all things tax related the calculation is somewhat more complicated than that.

Strictly under the provisions, an eligible entity is able to carry back as a tax offset, the lesser of the tax effected amount of the loss or the total balance of the franking account.

Let’s start by seeing who or what is an “eligible entity”:

  1. turnover needs to be $5 billion (yes folks, billion) or less;
  2. the entity needs to be a company, corporate limited partnership or a public trading trust throughout:
    • the income year you intend to claim the loss;
    • the income year you choose to carry the loss back to; and
    • any income years in between.

So just to be clear, sole traders, partnerships, investment and discretionary trusts are not eligible to access these provisions.

Next, what does it mean when we say the “tax effected amount”?  Broadly this means you take the loss and multiply it by the current corporate tax rate for your entity.  For a base rate entity for 2021, that number will be 26% for larger companies, it remains 30%.  Is this a problem?  For larger companies no, the tax rate has not changed for decades.  For smaller companies yes, because the prevailing tax rate in both the 2019 and 2020 financial years was 27.5%.  See the problem?  Yup, the offset amount we calculate to carry back will be at a lesser percentage than the tax you actually paid.  This may mean you won’t receive 100% of the tax you paid back.  It depends somewhat on the size of the loss in 2021.

What happens if the franking account is $nil?  Let’s just say you’ve been really good at paying dividends over the last few years and your franking account is $nil or close to it.  Then the carry back amount is also $nil.  The reason for this is extremely technical, and not something I want to bore you to death with, but suffice it to say that whilst this provision seems unfair, it is actually designed to prevent the company from having to pay franking deficit tax.  A tax designed as a penalty when the franking account balance goes into negative.

Can you choose not to carry your losses back?  Of course, this is a choice thing.  You can choose whether you want to carry your losses back or simply carry them forward to a future year.  Perhaps you can see 2022 being profitable when cash is low, at which point having some losses in the bank to use at that point in time would likely be beneficial.

Will you lose your losses if you’re unable to carry them back?  No, you simply carry them forwards instead.

Too technical as an article?  Hopefully not too bad.  Want to understand more and see whether it’s a provision you can access?  Contact us.

[gravityform id=”3″ title=”true” description=”true”]