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Working out the tax offset

How to work out the refundable tax offset when making a loss carry back choice.

Last updated 2 May 2024

Background

Media: Your guide to calculating the loss carry back tax offset
https://tv.ato.gov.au/ato-tv/media?v=bi9or7odetoe7qExternal Link (Duration: 07m:01s)

For more information on some of the topics mentioned in the video, see:

Loss carry back provides a refundable tax offset. Refundable tax offsets can reduce the amount of tax you are liable to pay to zero which may result in a refundable amount.

The amount of tax offset may be affected by your net exempt income, income tax liabilities and the surplus in your franking account.

If you are eligible, you can use the loss carry back tax offset tool to calculate the maximum amount you can choose to claim.

Exempt income

In working out the amount of your tax offset, you must reduce the amount of loss you are carrying back by any (unutilised) net exempt income you had for the income year you are carrying back the loss to. Refer to amounts not included as income.

Once the exempt income has been used to reduce a loss you are carrying back, you do not use it to reduce another loss carried back to that same income year.

Example: exempt income

In the 2018-19 income year, MNO Pty Ltd had net exempt income of $20,000.

MNO Pty Ltd has a tax loss of $100,000 in the 2019-20 income year and $50,000 in the 2020–21 income year. In the 2020-21 income year, it chooses to carry back all these amounts to the 2018-19 income year.

The $100,000 it carries back from the 2019-20 income year is reduced by the $20,000 of net exempt income in the 2018-19 income year to be $80,000 when calculating the tax offset.

It does not need to reduce the $50,000 it carries back from the 2020-21 income year because its exempt income in the 2018-19 income year has been fully used to reduce the loss carried back from the 2019-20 income year.

End of example

Tax liability in the year carried back to

The amount of your tax offset cannot exceed your income tax liability for the income year you are carrying the loss back to.

Once the amount of your income tax liability for an income year has been fully used to claim tax offsets, you cannot claim any further offset amounts by carrying back losses to that year.

Example: tax liability used entirely

In the 2018-19 income year, ABC Co had an income tax liability of $100,000 and no net exempt income.

ABC Co makes a tax loss in the 2019-20 income year and carries that loss back to the 2018–19 income year. It works out the amount of its tax offset for the 2019–20 tax loss would be $100,000. ABC Co has used all of its $100,000 income tax liability in the 2018-19 income year.

If ABC Co also made a tax loss in the 2020-21 income year, it cannot carry back that loss to the 2018-19 income year because the tax liability in that year has been fully used.

End of example

Franking account

The amount of your tax offset is also limited by the surplus in your franking account on the last day of the income year in which you are claiming the tax offset.

This rule does not apply if you were a foreign resident for more than half of all of the income years you are carrying losses back to. The exception is if you are a New Zealand company that has chosen to enter the Australian imputation system. Refer to Trans-Tasman imputation special rules.

Losses can only be used once

To the extent that you have carried back a tax loss, you can only use it once. This means you cannot:

  • carry the same tax loss back again
  • carry it forward to use it in a future income year.

This includes any losses that have been used to reduce your exempt income. Refer to How to claim a tax loss – Companies.

Example: loss used entirely

XYZ Co has a tax loss of $50,000 in the 2020-21 income year. It chooses to carry back all the $50,000 tax loss to the 2018-19 income year and receives a tax offset in the 2020–21 income year.

XYZ Co cannot carry forward and use the tax loss of $50,000 incurred in the 2020-21 income year as it has chosen to carry back that loss to the 2018-19 income year.

End of example

How to calculate the amount of tax offset

To calculate the amount of your tax offset for an income year follow these steps:

  1. For each tax loss you are carrying back to an earlier income year:
    1. Determine the amount of the tax loss you are carrying back.
    2. Work out the net exempt income, that has not previously been used, in that earlier income year.
    3. Subtract the amount at step 1b from the amount at step 1a.
    4. Multiply the result from step 1c by your tax rate for the income year in which you made the loss.
  2. If more than one tax loss is being carried back to the same earlier income year, add the step 1d results together. The amount you can claim is capped at the amount of your income tax liability for that earlier income year.
  3. If you are carrying back losses to more than one earlier income year, apply steps 1 and 2 for all years the losses are being carried back to and add the results together.
  4. If the amount calculated under step 3 is greater than your franking account surplus at the end of the income year in which you are claiming the tax offset, your offset is limited to your franking account surplus. Otherwise, the amount of your tax offset is the amount calculated under step 3.
    Note: Step 4 does not apply to foreign residents (other than New Zealand franking companies).

Example: calculating the amount of the tax offset

GHI Pty Ltd has a tax loss of $100,000 in the 2019-20 income year and an income tax rate of 30%.

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 2019-20 income year to the 2018-19 income year.

In the 2018-19 income year, GHI Pty Ltd had an income tax liability of $40,000 and no exempt income.

GHI Pty Ltd calculates the amount of its tax offset for the 2020-21 income year as follows:

  • Step 1a– $100,000 of loss carried back to the 2018-19 income year
  • Step 1b – $0
  • Step 1c– $100,000
  • Step 1d– $100,000 × 30% tax rate for the 2019–20 income year = $30,000
  • Step 2: No adjustment is required as the tax liability in the 2018–19 income year ($40,000) is greater than the $30,000 from step 1d
  • Step 3: As the loss is only being carried back to one earlier income year, the result of step 3 is $30,000
  • Step 4: As $30,000 is greater than GHI Pty Ltd's franking account balance at the end of the 2020-21 income year ($25,000), the amount of its tax offset is limited to $25,000.

GHI Pty Ltd calculates the amount of its refundable tax offset from loss carry back as $25,000.

End of example

Loss carry back tax offset tool

You can use the loss carry back tax offset tool to work out if you are eligible to claim the refundable tax offset. It also calculates the maximum amount you can choose to claim if you are eligible.

This tool helps you:

  • work out if you are eligible to claim the tax offset
  • calculate the maximum amount of tax offset you can claim if you are eligible
  • by providing a printable report with
    • all the information you provided
    • your eligibility
    • the maximum amount of tax offset claimable
    • the disclosures for each label in the company tax return that would be required to make your loss carry back claim.

You can use the loss carry back tax offset tool when preparing your company tax return for the 2020-21, 2021-22 or 2022-23 income year.

For information on payments, visit Paying your liabilities and claiming the tax offset.

 

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