Temporary Loss Carry Back Offset – Getting a Refund in Time for Christmas
The temporary loss carry back (LCB) offset for companies is unique in its features as it allows a current year loss to be carried back to an earlier year to obtain a refund of taxes paid in that earlier year. As the name suggests, the LCB is temporary and currently only allows losses in the 2020, 2021 and 2022 years to be carried back as far as the 2019 year. It is proposed that the LCB will be extended to losses incurred in the 2023 year, with the enabling legislation for this extension currently referred to a Senate committee for further consideration.
While the LCB applies to losses incurred in the 2020 year, the actual offset for 2020 losses could only be claimed in the relevant company’s 2021 income tax return. That is why LCB refunds have only recently been generated through the lodgement of 2021 company income tax returns.
A number of disclosures are required in the 2021 tax return for the LCB refund to be generated – there are 13 disclosures in total. It is firstly necessary to identify the year of loss (i.e. 2020 or 2021) and which year it is carried back to (2021 loss to 2020 or 2019, and 2020 loss to 2019). It is also necessary to disclose the tax rate in the year of the loss. This is an important aspect of the LCB rules, as the applicable tax rate to apply to the losses incurred to work out the offset is the tax rate in the loss year rather than earlier year.
Consider the example below:
Loss Co Pty Ltd had taxable income of $100,000 in the 2020 year and paid tax of $27,500 (at the tax rate of 27.5%) for that year. Loss Co incurred a tax loss of $100,000 in the 2021 year and decided to carry this loss back to the 2020 year. Loss Co works out the LCB offset to be $26,000, which is the loss of $100,000 multiplied by the tax rate of 26% in the 2021 year. Although Loss Co paid tax of $27,500 on its income in 2020, it is only able to get a refund of $26,000 through the LCB offset.
It is also important to note that the LCB offset cannot exceed the franking account balance at the end of the loss year. The capping of the offset to the franking account balance ensures that the company does not ‘over-claim’ taxes essentially passed on to shareholders in the form of franking credits in the past.
The temporary LCB offset is a generous measure that allows companies to obtain refunds of taxes paid as far back as the 2019 year. To get the actual refund however, the 2021 company income tax return will need to be lodged which has a number of disclosures that must be completed.
If you would like to discuss the above, please call Gaurav Chitnis.