House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Chapter 14: Extension of temporary loss carry back

Outline of chapter

14.1 Schedule 6 to the Bill amends the income tax laws to extend the loss carry back rules by 12 months, allowing eligible corporate tax entities to claim a loss carry back tax offset in the 2022-23 income year.

14.2 All legislative references in this chapter are to the ITAA 1997 unless otherwise indicated.

Context of amendments

14.3 In 2020 the Government introduced temporary tax incentives to support Australian businesses withstand the impacts of COVID-19 and to assist them to invest, grow and create more jobs. One of the temporary tax incentives was the temporary loss carry back measure.

14.4 Under the current law the temporary loss carry back rules apply to tax losses for the 2019-20, 2020-21 or 2021-22 income years, with the normal rules to apply from the 2022-23 income year.

14.5 The temporary loss carry back rules allow eligible corporate tax entities to offset tax losses against previous income tax liabilities to generate a loss carry back tax offset. Tax losses are 'carried back' and in effect applied against income tax liabilities in a previous income year as far back as the 2018-19 income year. The temporary loss carry back rules are in Division 160 of the ITAA 1997.

14.6 The choice to claim a loss carry back tax offset is an alternative to carrying tax losses forward as a deduction for future income years. Entities that do not elect to carry back losses under the temporary loss carry back rules can carry forward losses as per the normal rules.

14.7 The Government announced in the 2021-22 Budget that it will extend this tax incentive by 12 months. This means the tax incentive will now be available for another income year (i.e. the 2022-23 income year).

Summary of new law

14.8 Schedule 6 to the Bill extends the loss carry back rules by 12 months, allowing eligible entities to carry back tax losses in the 2022-23 income year.

14.9 As a result, the normal rules for losses will apply from the 2023-24 income year.

Comparison of key features of new law and current law

Detailed explanation of new law

14.10 Under the extended temporary loss carry back rules, a corporate tax entity with an aggregated turnover of less than $5 billion can choose to carry back a tax loss for the 2019-20, 2020-21, 2021-22 or 2022-23 income year and apply it against an income tax liability in a previous income year as far back as the 2018-19 income year.

14.11 The amendments extend the temporary tax incentive so that it is available in the 2022-23 income year. A corporate tax entity may be entitled to a loss carry back tax offset for the 2022-23 income year. The loss carry back rules are extended in their current form with the same eligibility requirements. [Schedule 6, items 4 to 18, the heading to Division 160, note 2A after section 160-5, sections 160-1, 160-5, 160-10, 160-15 and 160-25]

14.12 A corporate tax entity will need to make a choice to claim the refundable tax offset when it lodges an income tax return for the 2022-23 income year.

14.13 If the entity does not choose to carry back the tax loss it can apply the normal rules to carry forward and deduct the tax loss against income derived in later income years.

14.14 The temporary loss carry back rules will cease to apply after the 2022-23 income year. From the 2023-24 income year entities are only able to carry losses forward.

Consequential amendments

14.15 The note to the definition of 'carry back' is amended to refer to the 2022-23 income year. [Schedule 6, item 22, the note to the definition of 'carry back' in subsection 995-1(1)]

14.16 Minor amendments are made to other provisions which reference the relevant income years of the temporary loss carry back rules, updating these references to include the 2022-23 income year. [Schedule 6, items 1 to 3, 19 to 21, and 23, note 2 to subsection 36-17(1), the table in section 36-25, paragraph 195-15(5)(c), section 195-37 and paragraph 320-149(2)(aa) of the ITAA 1997 and paragraph (db) of step 1 of the method statement in section 45-340 in Schedule 1 to the TAA 1953]

Application, and transitional provisions

14.17 Part 1 of Schedule 6 commences on the first day of the first quarter following Royal Assent.

14.18 Part 2 of Schedule 6 commences on the later of immediately after the commencement of the provisions in Part 1 of Schedule 1or immediately after the commencement of Division 6 of Part 1 of Schedule 3 to the Treasury Laws Amendment (2021 Measures No. 5) Act 2021 (which is the Act that will be created if the Treasury Laws Amendment (2021 Measures No. 5) Bill 2021 is passed by the Parliament). However, Part 2 of Schedule 1 will not commence if that Act is not enacted. [Schedule 6, item 24, subsection 160-16(1)]