Temporary loss carry-back measure a potential lifeline for struggling SMEs

7 October 2020

This year’s Federal Budget has presented companies with a unique opportunity with the announcement that eligible companies will be temporarily allowed to carry back and utilise tax losses against prior year taxed profits, thereby generating a refundable tax offset.

Ordinarily, companies cannot apply current year tax losses against prior year taxed profits, however, this measure will allow them to utilise current year tax losses to generate an immediate cash boost, which they would not ordinarily be entitled to.

Companies with an aggregate turnover of up to $5billion can elect to utilise tax losses incurred in 2019-20, 2020-21 and 2021-22 income years to be carried back and applied against profits taxed in 2018-19 and subsequent years. The total amount of tax losses that can be carried back is limited to prior-year tax profits and cannot result in a franking account deficit.

For a large pool of companies this will be an opportunity to improve business cashflow through challenging times. Companies that have historically enjoyed taxable profits and surplus cashflow but have recently experienced a significant decline in profit, whether due to COVID-19 or any other reason, need to carefully manage cashflow to safeguard the ongoing operations of their business. The ability to utilise current year tax losses to generate a cashflow boost may provide the necessary funding these businesses need to support their business operations where alternative avenues such as bank and personal lending aren’t available.

The loss carry-back measure is also likely to assist companies in deciding whether to utilise the immediate deduction concession for eligible assets. Companies may have been hesitant to commit to expenditure on new assets if fully expensing the asset merely resulted in carrying forward tax losses for which the timing of the benefit is unknown. With the loss carry-back measures, eligible companies may now be able to receive the cash benefit by fully deducting eligible capital assets and utilising the resulting tax losses against prior year profits to generate a tax refund.

Whilst the new measure provides companies with several benefits, there are matters that impact the timing and amount of the eligible tax refund to consider.

  1. The loss carry-back measure can only be utilised following the lodgement of the 2020-21 tax return. Whilst tax losses from 2019-20 can be carried back, the first refund is only available upon lodgement of the 2020-21 tax return (after 30 June 2021). Businesses that require immediate cashflow support may need to consider alternative funding avenues.
  2. Companies that annually pay profits to shareholders by way of franked dividends may limit the amount of tax refund available. Simplistically, franked dividends contain a tax credit in respect of tax paid by a company. The loss carry-back measure provides a refund of company tax previously paid, however, if the credit associated with tax previously paid has been allocated to franked dividends paid out by a company, the company may not be eligible for a tax refund.

If you’d like more information on how your business can leverage the loss carry-back measure, please speak to your adviser or contact the Findex Accounting and Business Advisory team.

For more Federal Budget coverage and news as it comes to hand, visit our Federal Budget Resource Centre.