Tax relief for your business losses during COVID
For businesses that have taken a hit to their bottom line during the COVID-19 pandemic, tax relief may be available via the Government’s new loss carry-back scheme.
The scheme enables businesses that trade through companies and have suffered a loss in eligible years to carry that loss back against tax paid in earlier years, to generate a refund.
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Eligible companies can elect to “carry back” a tax loss incurred in the 2019/20 to 2022/23 income years and offset it against the income of the 2018/19, 2019/20, 2020/21 or 2021/22 years.
This generates a refund of tax paid in the earlier year in the form of a refundable tax offset.
As noted, the loss carry-back scheme is only available to companies.
Small businesses who trade through other entities - such as sole traders, partnerships and trusts - are not eligible. They can only carry forward losses to use in later years.
For a company to be eligible, it must carry on a business in the income year and the company’s aggregated turnover for the previous year (or an estimate of turnover for the current year) must be less than $5 billion.
In effect, the turnover threshold is so high that only the largest businesses will be excluded.
The following types of losses don’t count:
Tax losses arising from the conversion of excess franking offsets from dividends received (unlike individuals, companies that receive a dividend are not entitled to a refund of excess franking credits; instead, these excess credits are converted into losses by dividing the amount of the excess credit by the company’s tax rate. Losses arising in this way cannot be carried back)
Losses transferred to head companies on consolidation
The company’s franking account must be in surplus on the last day of the income year for which it claims the tax offset, and the surplus must be at least as much as the refund claimed.
There is a lodgement condition, namely that to claim the tax offset, the company must have filed its income tax return for that income year, as well as the previous five income years.
The offset is not automatic. To claim it, the company must make an election to do so in the appropriate box on the company income tax return.
The election must specify (in dollar terms) how much of a tax loss for a particular income year is to be carried back to a particular earlier income year.
The amount of the tax offset cannot exceed a company’s income tax liability for the income year it is carrying the loss back to.
To the extent that a tax loss has been carried back, it can only be used once. This means that you cannot carry the same tax loss back again or carry it forward to use it in a future income year.
To work out the amount of the tax offset:
Work out the total amount of the tax loss the company would like to carry back to a particular year
Multiply that figure by the tax rate for the income year that the company incurred the carried-back loss
Add all of the tax loss amounts that the company intends to carry back to that earlier income year and note that the amount of the offset is capped at the amount of the company’s income tax liability for that earlier income year
Note also that if the amount of the offset is greater than the company’s franking account surplus at the end of the income year in which the tax offset is being claimed, the amount of the tax offset will be limited to the credit balance in the company’s franking account balance at the end of that income year.
Bingo Pty Ltd is a business that has been hit by the pandemic and has made a tax loss of $100,000 in the 2020/21 income year. Bingo has an income tax rate of 30 per cent.
At the end of its 2020/21 income year, it has a franking account balance of $25,000 and chooses to carry back all its tax loss from the 2021/21 income year to the 2018/19 income year, when it had an income tax liability of $40,000.
Bingo Pty Ltd calculates the amount of its tax offset for the 2020/21 income year as follows:
Loss available to carry back is $100,000. Multiply this amount by 30 per cent (the tax rate for the 2020/21 income year) = $30,000
The tax liability for the 2018/19 year is $40,000 (which is greater than $30,000) and hence no adjustment needs to be made at this stage to the amount carried back
However, as $30,000 is greater than Bingo Pty Ltd’s franking account balance at the end of the 2020/21 income year ($25,000), the amount of its tax offset is adjusted to the lower of the two figures, being $25,000
Bingo Pty Ltd calculates the amount of its refundable tax offset from loss carry back as $25,000.
The specific integrity rule for loss carry-back denies a company a loss carry-back tax offset it would otherwise be entitled to where there has been a change in the control of the company arising from a disposal of shares and, considering all of the relevant circumstances, one or more parties entered into a scheme for the purpose of obtaining the tax offset.
To objectively establish what the purpose of the persons who entered into the scheme was, the relevant circumstances surrounding the share disposal must be considered.
The first relevant circumstance is the extent to which the company continues the same activities undertaken after the scheme for the disposal of shares has been implemented as prior to implementation.
The second relevant circumstance is the extent to which the company continues to use the same assets.
The third relevant circumstance relates to the nature of the scheme itself, including the way it was carried out, the form and substance of the scheme, the timing, relationships between the parties, etc.
Ordinarily, a change of control that arises from one generation retiring and handing over control of the company to the next generation or as a result of a marriage breakdown within family-owned companies would not trigger the anti-avoidance rules.
Mark Chapman is Director of Tax Communications at H&R Block.
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