Carry-Back Tax Losses – Who Can Claim?

From the 2012-13 income year, companies (but not trusts or other entities) will be allowed to carry-back tax losses so they receive a refund against tax previously paid.

For example, a manufacturer makes a profit in 2011-12 and pays $300,000 tax. The next year, they make a loss due to depreciation on new investments. They qualify for loss carry-back and are able to get up to $300,000 tax back a year.

However, loss carry-back will be subject to integrity rules and will be limited by a company’s franking account balance, the loss carry-back may not be available where past year profits have already been distributed as franked dividends.

Will new loss carry-back scheme rules mean less can claim?

Proposed rules contained in a recently released discussion paper about plans the government has announced on the new loss carry-back scheme could potentially restrict more businesses from using the benefit.

The scheme was announced as part of the 2012-13 Federal Budget, and proposes that companies can get a refund of up to $300,000 if they make a loss, by carrying back up to $1 million of losses and applying it against prior year profits.loss carry-back tax rules

But the discussion paper released by Assistant Treasurer David Bradbury in mid-July outlines plans to prevent “loss trafficking”, which would stop directors from buying companies that already have losses in order to use the carry-back rules to exploit the scheme.

But while tax experts say it’s reasonable to have some controls around how the benefit is accessed, a particular concern is the inclusion of the current integrity rules that apply when losses are carried forward — that is, the need to have continuous ownership and to carry on the same business.

The concern is that adhering to the rules may be difficult, as they essentially dictate that any business accessing the benefit needs to show consistency — however to stay successful and viable, companies will of course innovate and often change course.

The loss carry-back scheme is restricted to companies and is not available to sole traders, partnerships or trusts even though approximately three-quarters of all small businesses are not companies, This has drawn strong criticism from the small business community.

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