In 2020 the Australian Government developed an Economic Recovery Plan as a response to the effects of COVID-19. The plan was developed to boost economic growth, create jobs, invest in future industries and skills, remove red tape, guarantee essential services and restore confidence in a stronger recovery.
An element of the Government’s Economic Recovery Plan for Australia included the JobMaker plan, and part of this plan meant a temporary loss carry back tax offset measure was introduced.
The loss carry back incentive allows eligible businesses to apply tax losses against profits in a previous financial year.
Initially the loss carry back incentive was supposed to end in FY 21/22 but has been extended, so eligible corporate entities will be allowed to carry back losses as far as the 2018-19 financial year when they lodge their FY 2022-23 tax return.
Loss carry back tax offset explained
The loss carry back tax offset allows businesses with an aggregated turnover of less than $5 billion to apply tax losses against profits in a previous financial year. Due to the $5 billion turnover threshold most Australian businesses are eligible to apply this offset.
This initiative allows eligible businesses to carry back tax losses from FY 2019-20, FY 2020-21, FY 2021-22, FY 2022-23 income years to offset previously taxed profits in FY 2018-19 or later income years.
For instance, under the previous ruling if ‘Business A’ made a loss in FY 2020-2021 and didn’t return a profit until FY2022-23, Business A would have had to wait two years to claim back the losses. However, under this new measure Business A can use its FY 2020-2021 loss to amend its tax returns going back to FY 2018-2019, resulting in an immediate reimbursement of tax previously paid.
To be eligible for the loss carry back tax offset:
1. the amount carried back doesn’t exceed the earlier taxed profits
2. and that the carry back doesn’t generate a franking account deficit.
Thousands of Australian businesses have been impacted by the pandemic and are now recovering, the loss carry back incentive presents these businesses with a unique opportunity to continue recovery without detrimental effect to cash flow.
Loss carry back tax offset example
Claim depreciation to maximise loss carry back tax offset
Businesses can take greater advantage of the loss carry back tax offset with a tax depreciation schedule. A tax depreciation schedule allows businesses to maximise depreciation deductions while maintaining full compliance with current Australian Taxation Office (ATO) legislation.
Depreciation is the natural wear and tear of a property and the assets within it over time. The ATO allows owners of income-producing properties to claim this as a tax deduction.
Business A ordered a tax depreciation schedule and claimed the maximised deductions, because they also applied loss carry back tax offset, they were able to offset their historical taxable profit against FY 20/21 when they had a loss and as a result reduced their tax liability further.
The loss carry back incentive was intended to interact with temporary full expensing, encouraging new investment which may result in tax losses. Where the choice to carry back tax losses results in a tax refund, this will increase business cash flow.
Regardless of if the business owns the building or are tenants, they can benefit from the lucrative depreciation deductions available. Fees for depreciation schedules are 100 per cent tax deductible.
BMT Tax Depreciation take all current business incentives into account and apply them to qualifying assets when applicable. Claiming depreciation allows businesses to improve their cash flow and make the most out of loss carry back.
To find out how your business can benefit from maximising loss carry back with a tax depreciation schedule call BMT on 1300 728 726 or Request a Quote.