On the 6 October 2020 as part of the 2020/2021 Federal Budget the government announced an array of initiatives to support business and encourage new investment to help counter the impacts of the COVID pandemic. One of these was the introduction of legislation to allow a company to offset current year losses against prior year profits known as the loss carry back tax offset.
Prior to this initiative if a company incurred a loss it would have to wait until a future financial year where it made a profit to offset those losses.
Under the changes, commencing from the lodgement of the 2021 financial year tax return, a company will be able to elect to offset its losses against prior year profits and receive a refund of the tax it has previously on those profits. This means a company won’t have to wait until a future year to see the benefit of those losses.
How does it work?
As part of completing the tax return you can elect to choose whether to apply any current year losses against prior year incomes. Your accountant will guide you through which option will result in the best outcome for you.
It’s important to note that this is only eligible for companies with turnovers of less than $5 billion. If you are trading as a sole trader, partnership or trust then these measures will not apply to you.
You will also need to have paid tax in a relevant prior financial year and the loss can only offset an equal amount of profit in a prior year.
When does this commence?
The first financial year where you will have the choice to carry back losses is the 2020-2021 financial year and can extend back to profits generated in the 2018/2019 and 2019/2020 financial years.
Want to access this offset?
If you expect to have tax losses in the 2021 financial year you will need to wait until after 30 June 2021 before we can submit the company tax return. Contact the Francis A Jones team for more information.
Author: Nick Vincent